Economic downturns can be tough, and many Americans are concerned that a recession is on the horizon. While nobody knows for certain when or if a recession will occur, it's beginning to look more likely. In fact, there's a greater than 50% chance that the U.S. will be in a recession within the next year, according to research from investing firm TD Securities.
Again, it's unclear exactly what will happen with the economy. But if we do face a recession, there are a few steps you can take to keep your investments as safe as possible.
1. Avoid selling your investments
It can be tempting to pull your money out of the market when the economy is in a slump. Recessions and market downturns often go hand in hand, and if we experience a recession, there's a chance that stock prices could fall even further.
However, now is one of the worst times to sell your investments. Because stock prices have already fallen significantly, if you withdraw your money now, you could end up selling your stocks at a discount and locking in losses.
While it may sound counterintuitive, a safer option is to hold your investments, regardless of what the market does. You don't technically lose any money unless you sell, so by holding onto your stocks until the market eventually recovers, you can ride out the storm.
2. Strengthen your emergency fund
Because downturns are one of the worst times to withdraw your money from the stock market, it's especially important to have a healthy emergency fund. Ideally, this means having enough savings to cover at least three to six months' worth of living expenses.
If you don't have an emergency fund and you lose your job or face an unexpected expense, you may have no choice but to tap your investments. And if you're selling your stocks when prices are down, you could end up losing money.
3. Only invest in solid, long-term stocks
Market downturns and recessions can be a smart opportunity to invest more, because prices are significantly lower than they were a few months ago. By investing now, you can load up on quality stocks at a discount, then reap the rewards once the market recovers and stock prices surge.
The key, though, is to invest in the right places. Some stocks won't survive a recession, but healthy companies with solid underlying business fundamentals are the most likely to pull through.
Keep in mind that even the strongest stocks will likely take a hit in the short term. But over time, they're more likely to see consistent growth. By investing in these types of stocks and holding your investments for at least a few years, you'll give your portfolio the best shot at recovering from a downturn.
While it's uncertain whether a recession is looming or not, it's wise to start preparing, just in case. By building a healthy emergency fund, investing in quality stocks, and maintaining a long-term outlook, you can rest easier knowing you're keeping your money as safe as possible.