Home Business Insights & Advice What should you do to protect against future economic downturns?

What should you do to protect against future economic downturns?

by Sarah Dunsby
13th May 24 9:47 am

We may be on the way out of the global recession that kicked off in the wake of the pandemic, but with every downturn comes a lesson that must be learned: it can happen again. In fact, historically, the rate of economic downturns has been increasing as of late and, as such, it’s important for those with the means to prepare to get some plans in place. Here, we’re going to look at some strategies that have, typically, helped some get through recessions with more success than their contemporaries.

Yes, you should have an emergency fund

The tip of telling people to put together an emergency fund is one that has become controversial as of late, because many people simply can’t afford to set that money aside. However, it is good advice for those with wealth to protect. The Financial Services Compensation Scheme covers deposit accounts that have up to £85,000 in them. If you want to keep more than that, you can split it between different financial institutions. Indeed, you should make sure that if you’re using multiple banks, they are not part of the same financial institution, as putting more than £85,000 in them, collectively, could disqualify you from FSCS protection.

Pay off what debt you can

Paying off debt can provide a crucial buffer during a recession by reducing financial strain and increasing financial resilience. In times of economic downturn, job losses or income reductions can make it challenging to meet debt obligations. By reducing or eliminating debt before a recession hits, individuals can lower their monthly financial commitments and free up cash flow for essential expenses. Moreover, being debt-free reduces the risk of default or foreclosure, helping to protect credit scores and financial stability. Additionally, without the burden of debt payments, individuals have more flexibility to adapt to changing economic conditions, such as retraining for new job opportunities or investing in assets that may thrive during a recession, further safeguarding their financial well-being.

Put some money in gold

To say with confidence that any asset is “recession proof” would be making a bigger claim than anyone safely can. That said, there are assets that have, historically, outperformed others during recessions, and gold is one of those. Gold retained and increased in value during multiple recessions, going as far as to outperform stocks following the 2008 market crash. While it might not have the long-term growth of stocks, for instance, taking about 10% of your investment cash to buy gold bars will see that money outperform inflation, and could offer you a significant life raft in the event of a recession. What’s more, gold is highly liquid, so if you find yourself in need of cash during such an event, it’s much easier to pull it out of gold and other precious metals.

Avoid panicking in or out of markets

It’s very easy to see some bad motions in the water and to start preparing to abandon ship. Indeed, the idea of panic buying gold at the sign of a recession has become something of a trope in and of itself. However, putting all of your money in one market is never a good idea, panic selling can be very harmful and, indeed, leaving your money where it is is more likely to end up paying off in the long term. Your stocks might be losing a lot of value now, but pulling out during the dip removes the chances for them to recover at the end of the downturn, which happens for the vast majority of stocks.

Diversify while you can

Diversifying your investment portfolio can serve as a powerful defence mechanism during a recession. By spreading investments across different asset classes, sectors, and geographic regions, you can reduce the overall risk of exposure to any single economic event or market downturn. During a recession, certain sectors may perform poorly while others may remain resilient or even thrive. Diversification helps ensure that losses in one area of your portfolio are offset by gains in others, smoothing out overall investment returns and minimizing the impact of market volatility. Additionally, diversification can help capture opportunities for growth in diverse market conditions, enhancing the resilience of your portfolio and safeguarding your financial well-being during periods of economic uncertainty.

Consider a revocable living trust

One of the major risks during a recession is that you might find your income suddenly dipping to the point that you’re not able to pay off your creditors. As such, you may be concerned that those creditors will look after your assets, and you might want to do something to protect them. One method that some have taken to do that is to put those assets into a revocable living trust. These can help avoid probate and protect the privacy of the beneficiaries of the trust. If you put assets in a trust, they cannot be taken by a creditor. However, there are significant costs that come with setting up a trust, and if you plan to set one up, you should do so with the help of a lawyer.

Lock your interest rates

If you are able to see the signs of a recession rising, then you should be mindful that the policy makers will often raise interest rates in response to rising inflation levels as a means to control them. If you have an adjustable rate loan or credit card, this can see your monthly payments going up considerably. As such, you might want to look into consolidating or refinancing your existing loans into a fixed-rate arrangement instead. The rate might be initially higher than your variable rate loans, but it is not going to be at the whims of the policy makers in the event of a downturn.

There are no certainties when it comes to the market. However, the strategies above have proven useful for people in the past, so be sure to keep them in mind and, where possible, set some assets aside for the sake of protecting your future, not just growing it.

 

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any finance decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.

Leave a Comment

CLOSE AD

Sign up to our daily news alerts

[ms-form id=1]