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3 Things I'm Doing Today to Prepare for a Recession

By Maurie Backman - Feb 11, 2020 at 6:18AM

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Here's how this Fool is gearing up for a downturn -- and why you should do the same.

The tricky thing about recessions is that it's hard to know when the next one is going to strike. And sometimes, you'll hear rumblings of a recession when the market is doing extraordinarily well, the logic being that all good things economy-related must, at some point, come to an end.

While recessions are a natural and expected part of our country's economic cycle, the idea of one can be nerve-wracking. Here's what I'm doing to gear up for the next one -- in case it happens sooner than we think.

Man covering his face in front of screen showing downward graph

IMAGE SOURCE: GETTY IMAGES.

1. Padding my emergency fund

I always make a point of having about six months of essential living expenses tucked away in the bank. That way, if my income takes a hit, my home needs repairs, or there's a major issue with my car, I have money to tap without having to resort to debt. To buy myself extra protection in the face of a recession, I've been adding a bit more money to that account just to have a more solid cushion. While I am losing out on the opportunity to invest that extra cash, I have it in a high-yield savings account, so it's not earning nothing. And the peace of mind it's giving me is, frankly, worth a modest amount of missed investment opportunity.

Another thing: By padding my emergency fund, I'm helping ensure that I'll be able to leave my investment portfolio untouched should a downturn ensue. That's important, because you don't actually lose money during a recession until you sell off investments at a loss. If I'm able to leave my current stock positions alone, I won't lose money even if their value drops on paper.

2. Adding a few more dividend stocks to my portfolio

Dividend stocks can help you ride out a recession because they continue paying you even when the market on a whole is in the dumps. And while dividends are not guaranteed, buying stocks with a strong history of paying them means your portfolio is likely to generate quarterly income even when there aren't other gains to be had. You can check out this list of recession-friendly stocks to see if any of them have a place in your portfolio.

3. Setting aside extra cash to buy stocks on the cheap

In addition to boosting my emergency fund, I'm also in the process of scrounging up extra cash to buy up stocks on the cheap if a recession strikes. You'll often hear that it's best to sit back and do nothing when a recession takes hold, but actually, a recession is a great time to buy quality stocks at a lower price than what they'd typically command.

Recessions can be a scary thing if you're not prepared for them. Stock values can tank, jobs can be lost, and home prices can plummet. But if you take steps to make yourself recession-ready, you'll have less to worry about the next time the economy turns for the worse -- whether that happens a few months from now, or a number of years.

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