It’s no secret that the economy is slowly heading towards another recession. Even though it may be years away, it’s still important to start preparing your portfolio now, before we reach the next economic downturn.
Here are some of the best ways to protect your finances in the event of an impending economic downturn.
How to Forecast Recession
A recession is an economic downturn that lasts two or more consecutive quarters. In order to determine whether the United States is going into a recession, economists and investors follow three key indicators: the gross domestic product (GDP), personal consumption expenditures (PCE) and manufacturing sales.
The GDP measures the country's total economic output, or how much income is generated in a year. The PCE measures consumer spending habits; if this number decreases, it indicates that people are cutting back on spending money they do not have.
Manufacturing sales measure how many goods are sold by manufacturers; if this number decreases, it means factories are producing less goods and causing less investment in business ventures.
How to Spot a Bear Market
If you're planning on investing in the stock market, it's important to understand what a bear market is and how to spot one. Bear markets are characterized by their consistent decline in the value of stocks over time.
This is different from a recession, which is typically just temporary set-backs in the economy that result in drops in stock prices. You can spot an upcoming bear market by looking for major changes happening on Wall Street, like companies going out of business or major banks closing branches.
When these events happen, they cause investors to sell off their stocks as quickly as possible in order to save themselves from total losses. The decrease in demand for stocks causes the price of individual shares to go down, which can lead to a bear market if those same conditions continue for some time.
A lot of experts predict this will be the case after 2020 because there are not any new policies being proposed that would improve the current economic situation.
How To Pick Stocks During A Bear Market
A bear market is when the stock market is in decline and prices are going down. You might want to consider investing in stocks for long-term gains, but there are also stocks that you can buy now that will do well during a bear market.
Not all stocks go up during a bull market, so it's important to keep your portfolio safe during this time by choosing investments wisely. When considering which stocks to buy, think about the following:
● Are you looking for safe investments? Consider buying index funds or blue chip stocks. Both of these tend not to fluctuate as much as other common stocks.
● Do you need income from your investments?
Using ETFs and Mutual Funds During Bad Times
ETFs and mutual funds are both ways of investing your money so that it's not just sitting in one place. ETFs are better for people who want to invest on their own, but they can be more expensive than mutual funds.
Mutual funds charge a small fee, usually around 1% of the total amount invested, per year. This means that if you have $10,000 invested with them and the fee is 2%, then every year you will lose $200. Which is why many people think ETFs are better because you don't have to pay any annual fees.
ETFs can be risky because they trade like stocks, meaning when the market goes down (or even up) your investment goes down too.
The Importance of Bonds During Recessions
During the 2008 financial crisis, investors lost nearly 50% of their portfolios. This is because they had very little exposure to bonds and other fixed income assets.
Bonds are one of the best ways for investors to hedge against risk in their portfolios, because it guarantees that you will always get your principal back, plus interest, even if there is a downturn in the market.
The more you invest in bonds, the lower your volatility will be. It's important for any investor - whether they have already weathered past recessions or not - to continue diversifying their portfolio with bonds so that they can weather future recessions.