The chance of a recession falls under the category of systematic risk, which affects the overall market and not just an industry. Since this type of risk is both unpredictable and very difficult to avoid, you’re likely to see the effects of a recession in your portfolio.
Since markets tend to drop to some degree in such times, you’re likely to have the worrying experience of seeing your money’s growth slow or stop. You might even notice its value falling.
If this happens to you, what should you do?
Stay calm
While a recession can be a worrisome time for you, reacting on instinct isn’t a good idea. That’s because, while fear and doubt are normal emotions, they could lead to actions that could hurt your portfolio’s performance in the future.
Instead, you should make decisions based on facts and numbers. This means you’ll need to do a bit of research and math, but at the end of the day you’ll be confident in the choices you’ll make.
For example, if your stock holdings are down, you can see how those companies did during past difficulties. While this doesn’t guarantee that history will repeat itself, it does hint at how resilient these organizations can be.
Continue your strategy
If you’re investing for the long term, continuing to follow your strategy may be your best move even though you may not see the gains until the recession has ended.
That’s because investing consistently, through methods such as peso-cost averaging or value averaging, has historically been effective for growth. This is especially true if given enough time to recover from negative events such as a recession.
Remember that if you put money in an investment fund when prices are low, you’ll get more units or shares than you would when prices are at their normal level. This can lead to more substantial growth when the situation gets better.
Consider new additions
A third thing you can do is to consider putting the cash component of your portfolio in new investments. There are two options for this:
Liquid assets – These are assets which can easily be converted to cash without losing their value. While they typically have modest growth potential, they can be effective at helping your money grow while still keeping it accessible.
Safe havens – These are assets whose value is expected to stay the same or even grow during difficult times. There aren’t any standard safe havens, but precious metals (such as gold), cash, and some currencies and stocks have fallen under this classification in the past.
