| Just to be clear, we are not in a recession … at least not yet.
However, signs of an economic downturn are cropping up all over. As inflation continues to soar and the stock market experiences its worst first half of the year since 1970, many economists and financial experts believe that a recession is inevitable.
Additionally, some 68% of chief financial officers expect a recession to occur during the first half of 2023, according to CNBC's CFO survey.
With all this said, what can individuals do to prepare for a possible recession?
One advisor I spoke with said it's the right time to take advantage of dollar-cost averaging. That simply means you invest a fixed dollar amount on a regular basis, regardless of the ups and downs in the market. Although stocks are taking a beating right now, historically they recover well after a recession. If you don't have exposure to stocks, you will miss the eventual recovery, this advisor said.
Meanwhile, CNBC's Kate Dore spoke with several financial experts and they offered some proactive options to survive this anticipated recession.
These experts suggest diversifying your portfolio, including bond allocations, and adding to cash reserves.
Advisors are pushing clients to be proactive and make sure their portfolio is ready for a recession.
Diversification is critical when preparing for a possible economic recession. You can reduce company-specific risk by opting for funds rather than individual stocks because you're less likely to feel a company going bankrupt within an exchange-traded fund of 4,000 others, an advisor told CNBC's Dore.
Also, despite slumping prices, bonds are still a key part of a portfolio, advisors say. If stocks plummet heading into a recession, interest rates may also decrease, allowing bond prices to recover, which can offset stock losses.
Additionally, people need to make sure that they have sufficient emergency savings.
How do you know your savings needs?
Experts say when you think about the amount of money it will take to get you through a recession, it pays to focus more on your specific expenses than a dollar amount. That means you need to calculate your essential monthly expenses and then multiply that number by at least three, and, ideally, more like six to 12. For example, let's say you spend $3,000 a month on essential bills. For a six-month emergency fund, you will need to have $18,000 in the bank.
No one can predict when the next recession will hit. However, at some point a downturn is likely because that's the way the economy tends to cycle. So it's a good idea to be prepared with a smart game plan, whatever that means for you.
For more cool stuff like this, be sure to visit CNBC's Financial Advisor Hub and Personal Finance section. |
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