3 Key Brokerage Account Moves to Make Before a Recession Hits

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KEY POINTS

  • A recession could cause even more upheaval for an already turbulent market.
  • It's a good idea to assess your investments -- and make changes if needed before that happens.


It pays to check these off your list.

Are we headed for a recession later this year or early next? Unfortunately, there's reason to think we may be. 

The Federal Reserve is on a mission to slow the pace of inflation. To achieve that goal, it's been moving forward with aggressive interest rate hikes that are driving the cost of borrowing upward.

How's that supposed to help with inflation? It's simple. Inflation is a result of consumer demand exceeding the available supply of goods. If it gets too expensive to borrow, consumer spending is apt to decline. Once that happens, it should give supply chains a chance to catch up to demand, thereby easing inflation and making living costs more manageable for Americans.

But the Fed's actions could backfire. A rapid series of interest rate hikes could lead to a major pullback in consumer spending, rather than the moderate one the Fed is hoping for. And if consumer spending declines to an extreme, it could pave the way for a broad economic downturn. And that's something everyone should prepare for.

In fact, some financial experts have gone as far as to say that our next recession could be drawn-out and painful. Talk about upsetting.

There are different steps it pays to take ahead of a recession, like shoring up your emergency fund. But it's also important to pay attention to your brokerage account -- and make these key moves.

1. Make sure you're diversified

Maintaining a diverse investment mix can help protect you during periods of market volatility -- something a recession can easily lead to. If you're heavily invested in a single sector of the market, you may want to consider rebalancing before things get worse.

Granted, now's not necessarily the ideal time to rebalance your portfolio given the recent market sell-off. But even if you end up selling some stocks at a loss in the course of diversifying, you might scoop up replacement stocks at a steep discount, thereby canceling out that loss.

2. Unload underperforming stocks

If you own a stock that's been consistently losing value -- even before the broad market started swinging downward -- then you may want to cut your losses before a recession hits. If the economy tanks, the stock market could follow suit to a more extreme degree than what investors are dealing with now. And that could mean taking an even bigger loss on an underperforming stock down the line.

3. Invest in recession-proof industries

Though a recession is generally marked by a slowdown in consumer spending, there are certain industries that may be more recession-proof than others. These are industries you may want to consider investing in. Utility and energy stocks, for example, may be more apt to hold their value during periods of economic distress because those are things consumers can't easily cut back on.

The idea of a recession can be daunting. But if you make these key moves ahead of one, you may feel more secure that your brokerage account is equipped to ride out a downturn.

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