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Is a Recession Coming? How to Prepare Your Portfolio

Recent economic data and stock market declines may have you concerned about a looming recession. Stay the course, maintain diversification in your portfolio and protect your retirement savings if you can.

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Alana Benson

Editor & Content Strategist

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6 years of experience

Expertise

• Investing for beginners
• financial advice
• long-term investing

Alana Benson is an editor who joined NerdWallet in 2019. Historically she has covered a wide variety of investing topics including stocks, socially responsible investing, cryptocurrency, mutual funds, HSAs and financial advice. She is also a frequent contributor to NerdWallet's "Smart Money" podcast. Alana has appeared on FOX Houston and the "PennyWise" podcast and has been quoted in MarketWatch and The Sun. Before joining NerdWallet, she wrote two books on identity theft and several young adult nonfiction titles. Her work has been featured in The New York Times, The Washington Post, The Associated Press, MSN, Yahoo Finance and MarketWatch.

Published in

Editor & Content Strategist

Alana Benson is an editor who joined NerdWallet in 2019. Historically she has covered a wide variety of investing topics including stocks, socially responsible investing, cryptocurrency, mutual funds, HSAs and financial advice. She is also a frequent contributor to NerdWallet's "Smart Money" podcast. Alana has appeared on FOX Houston and the "PennyWise" podcast and has been quoted in MarketWatch and The Sun. Before joining NerdWallet, she wrote two books on identity theft and several young adult nonfiction titles. Her work has been featured in The New York Times, The Washington Post, The Associated Press, MSN, Yahoo Finance and MarketWatch.

Arielle O'Shea

Head of Content, Investing & Taxes

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19 years of experience

Expertise

• Retirement planning
• investment management
• investment accounts

Arielle O’Shea leads the investing, advisory and taxes content teams at NerdWallet. She has covered personal finance and investing for 20 years, and was a senior writer and spokesperson at NerdWallet before becoming an editor. Previously, she was a researcher and reporter for leading personal finance journalist and author Jean Chatzky, a role that included developing financial education programs, interviewing subject matter experts and helping to produce television and radio segments. Arielle has appeared on the "Today" show, NBC News and ABC's "World News Tonight," and has been quoted in national publications including The New York Times, MarketWatch and Bloomberg News. She is based in Charlottesville, Virginia.

Published in

Head of Content, Investing & Taxes

Arielle O’Shea leads the investing, advisory and taxes content teams at NerdWallet. She has covered personal finance and investing for 20 years, and was a senior writer and spokesperson at NerdWallet before becoming an editor. Previously, she was a researcher and reporter for leading personal finance journalist and author Jean Chatzky, a role that included developing financial education programs, interviewing subject matter experts and helping to produce television and radio segments. Arielle has appeared on the "Today" show, NBC News and ABC's "World News Tonight," and has been quoted in national publications including The New York Times, MarketWatch and Bloomberg News. She is based in Charlottesville, Virginia.

No one can predict when the next recession will occur. But it never hurts to be prepared. If a recession is coming, there are steps you can take now to shore up your investment strategy.

Below are five things investors can consider to help get their portfolios ready for a potential recession.

1. Think before you rebalance

Rebalancing your portfolio — which involves buying and selling investments to restore your original asset allocation, or mix of stocks, bonds and other investments — is usually a good idea, but not during a market sell-off. When things are looking bleak, consider holding on to your investments. Selling during market lows can be one of the worst things you can do for your portfolio — it locks in losses. When the market evens out down the road, rebalancing may be in order.

When you do eventually rebalance, don’t discredit the emotions you had during recent stock market crashes. Knowing how you’ve reacted during past market fluctuations should be factored into how you allocate your investments going forward: If you pulled your money out of the market, or otherwise couldn't deal with the volatility, you may want to rebalance into a slightly more conservative portfolio so you can feel confident and weather future market drops with less stress.

If you’re not sure how your portfolio should be invested, consider opening an account with a robo-advisor, a digital investment management service that will help you determine your risk tolerance and then select and manage your investments for you.

Brokerage firms

on Charles Schwab's website

on E*TRADE's website

on Vanguard's website

on Fidelity's website

2. Consider "buying the dip"

If you're in the kind of financially stable position that allows you to buy in a downturn, you could be setting yourself up for success down the line by doing so. Since timing the market perfectly is next to impossible, don't worry about trying to find the exact moment when stocks are at their lowest. Think about picking a few investments you've always wanted to own and give yourself a price threshold you feel comfortable with. If they drop to or below that threshold, you may get a bargain. Here's a primer on how to invest in stocks if you're new to this.

For long-term investors, a market downturn can simply mean stocks and other investments are on sale. If you're not already investing, you can take advantage with one of our picks for the best investment accounts.

If you're already feeling financially strapped or may be facing unemployment, don't hedge your bets on a volatile market. Your money is better utilized in an emergency fund than on a risky investment. Only try to buy the dip if you can stand to lose that money.

» How to find cheap stocks

3. Remember why you chose your investments

Ideally, you chose them for diversification: Diversifying your investments can reduce your risk, just like spreading out your pieces in a game of Battleship — if they’re all in the same place, they’re more likely to get sunk.

Diversification doesn’t just mean allocating your money across different forms of investments like stocks or bonds. It also means that your money is spread across industries, geographic locations and companies of various sizes. This is always important, but careful diversification can especially protect you during a recession. When you're considering buying the dip, think about buying assets that increase your portfolio's diversification.

» Learn more: How to invest in a recession

4. Look at the necessities

Utilities are a classic lower-risk investment, but why? Utilities are essentials, and hopefully, most people will not have to forgo them during a recession. Household goods and other necessities are also considered recession-friendly investments.

It would be rash to move your entire portfolio in this direction, but adding a utilities or consumer staples index fund or exchange-traded fund can add stability to your portfolio even if the economy starts to feel uncertain. Here’s more on investing in index funds.

Note: You'll probably see lots of articles claiming a particular investment is recession-proof. It’s OK to listen to the buzz, but don’t buy into the noise without researching the company and industry.

» Learn more: Recession-proof stocks

5. Think about staying invested if you can

Try not to panic about the scary headlines and remember that staying invested is almost always the best response. Historically speaking, investors who hold on to their investments through recessions see their portfolios completely recover, and individuals who don’t invest in the market at all lose out.

Part of staying invested means protecting your portfolio from emergency expenses: Losing a job or having no emergency fund can force investors to dip into their investments. But most retirement accounts charge strong penalties — and often taxes — for early distributions.

The general aim is to have three to six months of living expenses saved in an online savings account, but if you can't get there right now, you're not alone in that struggle. Even a cash cushion of $500 helps.

If you don't have any emergency savings, there are other strategies you can use to deal with a financial setback. And if you have to dip into a retirement account, know that a Roth IRA is typically the best last resort: it allows you to pull out contributions without taxes or penalties.

Helpful resources