If you've been following the market, you're no doubt aware that 2017 has been quite the year for investors. Things have been so good, in fact, that more than one-third of Americans are waiting for the bottom to fall out. Specifically, 36% feel that the next major recession could hit as early as 2018. Yikes.
Of course, there's no telling exactly when the next recession will come to be, but it's bound to happen eventually. That's just the cyclical nature of the economy. So the best the rest of us can do is know how to prepare.
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Expect your investments to take a hit
When we hear the word "recession," it's easy to imagine stock prices plummeting before our eyes. And while that's a frightening notion in theory, it doesn't have to be one in practice. The reason? If you're investing for the long haul, a recession -- even a lengthy one -- probably won't matter, because the stock market has a strong history of recovering from even the harshest of blows. On the other hand, if you're close to retirement, you may want to shift some investments into safer vehicles, like bonds or even cash -- but only if you're serious about retiring in the next year or so, and don't have another solid source of income you can fall back on.
Remember, the only way to lose money on investments is to sell them at a loss. If a recession does hit in the near future, and your portfolio loses, say, 20% of its value, that's only a loss on paper until you actually cash out your impacted investments. So if you're in a situation where you're planning to retire shortly, but expect to have enough income between your Social Security benefits and anticipated part-time work to cover your living expenses, then you can, for the most part, leave your investments alone.
Beef up your emergency savings
The great thing about having plenty of cash on hand is that it's guaranteed principal. Of course, the relative value of a dollar can drop, but a dollar is still a dollar, no matter how poorly the market is performing. But more importantly, cash buys you the flexibility to leave your investments alone while the market is busy taking a beating -- and that's reason enough to boost your emergency fund before things start to go south.
We just talked about the fact that the only way to lose money on investments is to actually sell them off at a loss. So if you have enough cash on hand to support yourself without having to tap that portfolio, you'll give yourself ample time to ride out the next downturn that comes our way.
Having a healthy emergency fund is also crucial during periods of impending recessions because that's when job security tends to fall by the wayside. During the last major recession, which peaked between late 2007 and early 2010, an estimated 8.7 million jobs were lost. If you double up on emergency savings -- say, go from having three months' worth of living expenses in the bank to six months' worth -- you'll be better protected in the event that you do find yourself floating a gap in income.
Don't panic, and have a backup plan
One final thing to keep in mind when contemplating the impact of a recession: Don't panic. Recessions don't last forever, and even if you're a full-fledged retiree who's dependent on investment income, there are other options for getting by. You could, for example, secure a part-time job to drum up extra cash, or work on cutting your living expenses while you ride out the storm. You might also look into downsizing if you're sitting on a property that's larger than what you need. If you're among the majority of homeowners who enter retirement mortgage-free, you'll not only lower your maintenance costs, but potentially pocket some extra cash if your place sells at a gain.
Whether or not we'll see a recession in 2018 is yet to be determined, but what we do know is this: The more you prepare for what could come to be, the better you'll sleep at night.
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