Economic slumps can be unnerving, and many investors are concerned about how a potential recession could affect their finances. To be clear, the U.S. is not officially in a recession just yet. Despite slowing economic growth, the National Bureau of Economic Research (NBER) -- the organization responsible for deciding when the country is in a recession -- has not made the call so far.
However, that doesn't mean you can't prepare, just in case. Recessions and stock market downturns often go hand in hand. If a recession is potentially looming, should you pull your money out of the market now?
What does a recession mean for your investments?
A recession will often -- but not always -- coincide with a stock market downturn. While the market entered bear territory earlier this year, stock prices have been rebounding in recent weeks. If we face a recession, there's a chance that the market could fall yet again.
It may seem like a good idea, then, to pull your money out of the market now before a potential crash. But that can sometimes be a risky move.
The stock market is unpredictable, and even the experts don't know exactly how it will perform. While the market could decline in the coming months, that's not a guarantee. Case in point: Back in 2020, when the NBER officially declared a recession, the S&P 500 was seeing unprecedented growth and breaking records nearly every day.
If you withdraw your money now, there's a chance that the market could continue surging -- and you'll miss out on those gains. Also, if you decide to reinvest later, you may end up paying higher prices for the exact same investments you just sold.
What should you do with your money right now?
When the future is uncertain, it can be tough to decide how to handle your investments. But in most cases, the best thing you can do is nothing.
Although it may seem counterintuitive, simply waiting it out during periods of economic turbulence can actually keep your investments safer. The stock market could fall during the short term, but its long-term performance is far more important.
Historically, the stock market has recovered from every single downturn and recession it's ever faced. Chances are extremely good that it will recover from this one, too. By holding your investments throughout any potential volatility, you can come out the other side unscathed.
Keep in mind, too, that you'll only lose money if you sell your investments. Your portfolio could lose value in the near term if stock prices sink. But as long as you stay invested until the market recovers, your portfolio should rebound without you losing any money.
Easy ways to protect your savings
The easiest way to keep your money safe during a recession or market downturn is to keep a long-term outlook and avoid making any knee-jerk decisions as a result of short-term market movements. Double-checking that your portfolio is properly diversified can also protect your investments. When you're investing in at least 25 to 30 stocks from multiple industries, your portfolio will remain strong, even if one or two companies don't survive a recession.
Nobody knows for certain whether a recession is looming, but it can be wise to start preparing now. By keeping your money in the stock market and maintaining a long-term outlook, you can rest easier knowing you're doing everything possible to protect your investments.