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58% of Investors Expect a Recession in 2020. Here's How to Prepare for One

By Maurie Backman - Jan 19, 2020 at 6:18AM

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The idea of a downturn may seem frightening, but you can gear up for one.

The fact that the economy has been fairly strong of late is a good thing. Or is it? The nature of our economy is such that what goes up tends to eventually fall back down -- meaning, we can't discount the possibility that 2019's stock market rally will slowly but surely give way to a downturn at some point in 2020.

In fact, 58% of investors say a recession is likely in 2020, reports Fortune Magazine. If you're worried about how you'll fare financially if the economy takes a turn for the worse, here are three ways to gear up for that possibility.

Man at laptop holding his head

Image source: Getty Images.

1. Boost your emergency fund

When a recession hits, the whole economy is affected. That means employers are often forced to downsize, investment portfolios are worth less, and home values decline. All of this means one thing: You need plenty of cold, hard cash on hand to ride out the storm, and that's where your emergency fund comes in.

Under normal circumstances, it's wise to have enough money in the bank to cover three to six months of essential living expenses. The thought process here is that having that sum on hand could tide you over during a period of unemployment, or help you keep your investment portfolio untouched when the need for money arises and you want to avoid taking losses on your holdings.

If you're really concerned about a downturn, it never hurts to pad that emergency fund. You could try socking away nine months' worth of living expenses if you want extra peace of mind. Don't go overboard, though. The money you leave sitting in cash can't generate growth, aside from the modest amount of interest on your savings account.

2. Don't dump investments, diversify them

It's true that during a recession, the market tends to broadly underperform. But that doesn't mean you should unload your stocks and mutual funds for fear that one is imminent. Recessions are often short-lived, and the stock market has a proven history of recovering from downturns.

That said, it's a good idea to make sure your portfolio consists of different investments. These should include stocks and bonds, and within each category, you should aim for a reasonably wide array. For example, don't buy energy stocks alone -- bring healthcare stocks and auto stocks into the mix. And load up on dividend stocks, which will often continue paying you even when their value declines. Index funds are another great way to get instant diversification in your portfolio.

Also remember that while your portfolio value may decline during a recession, you don't take actual losses unless you sell your holdings during that time. And having ample cash on hand is a good way to avoid that.

3. Make a few strategic career moves

As mentioned already, a big danger in recessions is unemployment. But you can minimize that risk by increasing your value as an employee. Try to learn new skills and dabble in different areas of your employer's business to become more well rounded. If layoffs are necessary, but you prove yourself to be an integral part of the team, there's a good chance you won't be the one who's let go.

At the same time, look at getting a side job on top of your main one. Not only will it help boost your emergency savings, but it'll also give you a fallback if your main source of income goes away.

The idea of a recession can be scary, but it doesn't have to be. It's hard to predict exactly when the next one will hit, how long it will last, and how each of us will be affected. But if you prepare, you're more likely to sail through the turbulence unharmed.

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