How to Protect Your Assets During a Recession

With the bull market entering its fifth year, fears of a recession have grown alongside talk of a downturn that—with the amount of pundit naysaying at present—could happen at any moment. Trade fears, Brexit, and any manner of economic fluctuations don’t serve to soothe investor jitters, either. This is especially true if you’re exposed to specific industries that have more to lose than others due to these trends.

Whether you’re bracing for the prospect of a full-on downturn or merely want to rebalance your investment portfolio to stave off losses in the event of market turbulence, there are savvy steps you can take right away to protect your assets in the event of a recession.

Keep a Cool Head and a Steady Hand

When financial uncertainty strikes, it’s important to act decisively rather than hastily. One of the biggest mistakes corporate investors make is an abrupt and severe change to their portfolio strategy. The temptation to pull out of a bear market entirely is a compelling one, but it’s not always the right solution. On the other hand, keeping investments in flagging sectors or investment positions might mean throwing good money after bad. These are just a few avoidable missteps when reacting to an economic downturn that may seem more conservative than they actually are—while costing you avoidable losses all the while.

Making a hasty retreat from the market is perhaps the biggest thing investors want to avoid when trying to protect their assets during a recession. There are several reasons not to convert your holdings into cash. First, you may miss out on the rebound when markets improve. As long as you're not nearing retirement age or need access to cash quickly, you're almost always better off weathering the storm and waiting for your investments' value to improve.

Another reason not to pull out entirely is due to other, less rash alternatives being out there and easy to find. For example, you could shift some of your portfolio to historically less volatile investments in federal and municipal bonds. Or, if you have a stock-heavy portfolio and want to hedge against losses, you could shift money into mutual funds and exchange-traded funds. These options allow you to stay in the market without tying your money to one or more specific stocks.

Lastly, you may also want to think twice about withdrawing from the market because of the penalties and taxes you could incur. If you divest from your 401(k) before you turn 59.5 years old, you'll have to pay a 10 percent penalty on what you withdraw. Alternatively, if you pull your money out of stocks and other market holdings that have turned a profit, you'll be subjected to capital gains tax. This is particularly damaging if you intend to re-invest in the market once economic conditions improve; you will have ended up paying taxes on money you end up reinvesting when you didn't have to.

Making Smarter Decisions Means Being Decisive

When a recession hits, the temptation to take immediate action is high. Not moving quickly can feel irresponsible at best, and downright reckless at worst. But with all matters related to finance and investing, the key is to move decisively when the time is right, rather than when headlines force an emotional reaction instead of a logical one. The appropriate time to make moves in a recession or economic slowdown is largely dependent on your own asset mix—not the front-page news in the business section of the paper.

Gut instinct is a powerful thing—but it's not always the best deciding factor with regard to investing. The urge to pull back during a bear market is strong, but acting rash and reacting to market conditions in the moment can do more harm than good. Today's downturn is tomorrow's bull market, and impulsive decisions could leave you out in the cold when things turn around.

It's always better to make a plan for your portfolio before a recession hits. That way you can satisfy the urge to act decisively when trouble looms, but without making a hasty decision that is borne out of nervousness or an urge to "do something" without a strategy. Work with your financial professionals to develop a plan for a handful of economic scenarios.

On the other side of the coin, there's a risk of doubling down on the wrong investments as well. You may be familiar with the "sunk cost fallacy" which, in essence, describes our innate instinct to double down on investments (be they financial, intellectual, or emotional) even if they are not showing signs of improving. Human beings tend to be reluctant to cut their losses, but there are plenty of instances in which this is the best course of action for investing.

The Value of Making a Plan (and Sticking to It)

Preparedness means developing a strong plan and sticking to it, if and when conditions require you to react. This is true for all sorts of scenarios in life, and investing is just one of them. Coming up with a plan before a recession or downturn hits is crucial: you’ll be able to develop a blueprint for what to do when cooler heads are in short supply, and can even stress-test your strategies before grappling with problems in real-time.

It's always better to make a plan for your portfolio before a recession hits. That way you can satisfy the urge to act decisively when trouble looms, but without making a hasty decision that is borne out of nervousness or an urge to "do something" without a strategy. Better yet, develop a handful of plans that account for several economic conditions. These include a short, medium, and long-term recession as well as strategies for weathering market volatility during a late bull run. Your financial team may also want to account for other scenarios as well.

Predicting the future is a fool's game, and even the best plans sometimes fall short of safeguarding us from the unpredictable. If your portfolio takes a hit during a down market in ways that your plan didn't anticipate, the next best course of action is to keep a steady hand and a practical mindset. If you're afraid of falling prey to the sunk cost fallacy, be sure to get input from financial experts on the long-term outlook for your holding. At worst, you end up losing money on your investment—but you can make sure you're not losing more than you need to by thinking clearly.

Market-Wise Moves for Protecting Your Assets in a Recession

The best plan for protecting assets during a recession is unique to each investor. After all, one’s exposure to markets and turbulence comes down to portfolio allocation and the amount of money in the market to begin with. There are, however, a few basic tips that can help most investors weather out the storm.

Reducing Risk through Low-Yield Investments

Direct exposure to the markets through stocks and other products seem appetizing during a bull market, but great reward comes with great risk. If you've made the most of the current financial uptick, and want to make good on your gains, it might be smart to move money into steadier options like bonds, mutual funds, and ETFs. These investments may not create the same outsized returns of well-performing stocks, but they are subject to fewer fluctuations as markets move.

Increasing Your Liquidity (The Right Way)

Having a more liquid position during a recession is by no means a bad move. This is especially true if you foresee a need to quick access to capital during a prolonged recession, or are nearing retirement and may not have enough time to keep your money in the market for the next bull run to happen.

If this rings true for you, there are still ways to make the most of your liquid holdings. For example, consider opening a money market account rather than a traditional checking account. With a money market account, you'll get the best of both worlds that checking and savings accounts provide. You'll have the quick access to cash that comes with a checking account, and can still earn interest based on current interest rates within the money market.

Smart Tactics for Retirement Planning

Getting financially ready for retirement isn't easy, especially if a recession looms on the horizon. No one wants to be near retirement age during an economic downturn, but it's impossible to time the markets—or, even worse, to make hasty decisions with the money you've worked so hard to stash away.

Even if you can predict market trends, you can still give yourself a competitive edge by thinking about the long view. If you're five years out or fewer from retirement, it might be time to put your money into safe, low-yield investments. Sure, there's a chance of missing out on the full potential of your investments' value, but better to exit before the peak than afterward. If your retirement is five or more years away, you may want to be a bit more patient and see how the markets move. Reallocating your portfolio to safer investments can make it less painful to keep a stake in the market, too.

You might not be able to time the markets—be it during a bull run or a downturn—but you can prepare for these scenarios and make the most of fluctuations. A recession is particularly hard to pin down, making it essential to come up with an action plan ahead of time. By approaching an economic downturn with the right mindset and strategy, you can mitigate the worst effects of a bear market, or at least protect your assets as best as possible.