Is Your Retirement Portfolio Recession-Proof?

While the government shutdown may now be over, its effects will likely still linger for a while. But one thing the shutdown really brought to the fore is the fact that many American households will be unprepared for the next recession. We found out that many government employees weren’t prepared for missing even a single paycheck, and many more would have been in dire straits after missing two paychecks. And while government employees aren’t likely to be laid off during a recession, they’re still going to be affected once financial markets start to crash.

Overall, nearly 80% of American households live paycheck to paycheck. All it takes is one small disruption or one unexpected car or medical bill and they can find themselves in debt, trying to claw back out. The prospects for severe disruption in the event of a recession, then, are dire. And with every indication that the economy may be on the cusp of a recession, that’s cause for worry. All the more reason for households to start taking the proper measures today to recession-proof their finances.

Get Your Personal Finances in Order First

The key to getting out of a paycheck to paycheck existence is getting your personal finances in order. That requires planning and discipline. Too many times you hear of people who decide to invest in stocks, buy gold, or start flipping houses, oblivious to the fact that they’re already carrying a mountain of debt. Get yourself out of debt first before you start trying to save and invest. If you’re carrying over thousands of dollars of credit card debt every month you have no business spending thousands more on gold, stocks, real estate, or any other type of investment. Get yourself out of debt and on the path toward saving first, then think about investing.

Saving doesn’t have to be difficult, either. It’s as easy as figuring out what you’re spending your money on, determining what is necessary spending and what is superfluous, and then finding a way to keep from being tempted to blow your surplus funds on frivolous things.

What can be helpful is splitting up your paycheck so that a portion of it is deposited to a separate account that you don’t touch it except perhaps for a rainy day. If you can send 5, 10, or 20 percent of your paycheck to a separate account and be disciplined enough not to touch it, you can easily start saving thousands of dollars a year. That can help build up both a rainy day fund and an investment fund.

Start Investing

Most experts recommend that you save a bare minimum of 3-6 months worth of living expenses. So if you’re spending $2,000 a month you’ll need $6,000-12,000 saved up. Some experts even recommend having 12 months of living expenses saved up, in the event that you’re laid off during a recession, injured on the job, etc. That’s great if you can afford to do that.

But once you have that emergency fund saved up any extra money should be put to better use than just sitting in a bank account. Cash is a famously lousy investment. And even though cash outperformed stock markets last year, over the long term it will lose its purchasing power to inflation. That’s why you need to put your savings to work making you more money.

Make Your Portfolio Recession-Proof

With most investments, the more risk you take on the greater your reward will be. That has led many people to put their money in the stock market in the hopes of making great gains. While that may have been a great strategy during the legendary bull market of the 1980s and 1990s, stock gains since then have been rather haphazard. And with both the dotcom bubble and the financial crisis occurring since then, investors have been almost as likely to book huge losses as they have been to see huge gains.

Investors who realize that recessions are coming can take steps to protect their assets from losing value. By investing in countercyclical assets such as gold, they can continue to see portfolio gains while most other investors are seeing losses. During the financial crisis stock markets lost more than half of their value while gold gained 25%. It wouldn’t surprise anyone if gold saw that same type of performance during the next recession.

If you’re worried about your portfolio losing value during a recession, you owe it to yourself to look into investing into gold. The last thing you want is to look at your account balances a few years down the road and think to yourself that you should have invested in gold before the recession hit. Being proactive in defending your retirement portfolio is a necessary step if you want to make sure that you can retire comfortably.