Nowadays, you'd be hard-pressed to find any conversation about the economy that didn't center around a looming recession. On a basic level, a recession is a large decline in economic activity that lasts for at least a few months.
Regardless of whether things happen as people expect, it's always better to be overprepared than underprepared. Here's how investors can ride out the recession storm.
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Prioritize your emergency fund
Before you focus on investing, your priority should be to have an emergency fund. This money gives you breathing room in case an unexpected emergency occurs. It could be from a job loss, car repair, or house repair. Nobody likes unexpected expenses, but emergencies, unfortunately, happen.
You don't want to be in a position where you have to take out a loan or sell your stocks to cover an expense. Both options are expensive, whether due to the interest charged or potential tax implications.
The general rule of thumb is to have three to six months' worth of expenses saved. If you're single and only responsible for yourself, you could feel comfortable with three months. If you have a family and children, you should aim for the higher range. Given the increased uncertainty that comes with a recession, it may be better to aim for six months to a year's worth of expenses saved.
Lean on blue chip stocks
There are great stocks, and then there are blue chip stocks. These are well-established household names that have proven they can produce good long-term returns, regardless of the broader economic conditions. Take companies like Apple (NASDAQ: AAPL), Coca-Cola, and Walmart, for example. They are industry leaders with dependable business models and strong balance sheets, which are important for a company to weather bad economic storms.
Although not every blue chip stock pays a dividend, many have long histories of not only reliably paying dividends but also increasing them over time. You can't predict how a stock's price will move, but you'll know how much a dividend payout will be and when you'll get it.
All three blue chip stocks mentioned above are down (sometimes significantly) in 2022, yet all their shareholders have received dividend payouts during that time. Dividends can reward investors for being patient and holding onto a stock.
Spread out some of the risks
There's no risk-free stock investment, no matter how foolproof an investment may seem. However, investors can minimize some of this risk by relying on broad exchange-traded funds (ETFs). ETFs contain many different stocks in a single investment.
ETFs that focus on large-cap companies (those with a market cap of at least $10 billion) can be a way for investors to get the long-term stability that typically comes with larger-cap companies, while also getting the diversification that comes with broad-based ETFs. Take an ETF like the Vanguard S&P 500 ETF (VOO 1.24%), for instance, which contains the 500 largest public U.S. companies spanning all major sectors.
You never want the success of your portfolio to be too reliant on too few companies at any time, but it's especially true during rough economic times.
Stay the course
If you're anxious about the economic future, it can be tempting to stop investing until there are brighter days. But this can be counterproductive to your long-term financial goals, especially if you have time and the means to keep it going. Stock prices generally drop significantly during recessions, but it can be a chance to grab some great stocks at a discount.
Investors often find that the best returns on their investments come when they buy during down periods and eventually reap the full benefits of a recovery. If you're focused on the long term -- which is a proven way to invest successfully -- you don't want to make short-term decisions that go against your best interests.
Preparing to weather a recession and take advantage of it by continuing to invest when prices are lower is one of the best things any investor can do right now.
