Recessions happen. The economy may stumble for any number of reasons, the important thing is that eventually it will falter.
Recession fears currently revolve around the coronavirus. A number of companies have reported that they expect lower revenue due to problems caused by the spread of the virus. Those issues may be short-term, or the world could be facing months of disruption. It’s impossible to know the extent of damage to the economy the coronavirus will cause and whether that will lead to a recession.
Still, whether it’s coming now or later, a recession will come at some point. There are, however, some things you can do to prepare when you think the economy will fall into recession territory.
1. Have some cash on hand
A recession offers stock market buying opportunities. Sometimes good companies see their share prices fall and you can but them at a discount.
If you buy during an economic downturn, you want to look at why a stock’s price has fallen. Is the market reacting irrationally? Has the company suffered in a way that’s not likely to be repeated (like a chain having to close locations due to the coronavirus)?
Good companies generally don’t become bad stocks because of a recession. They do, however, often go on sale because of the overall economic environment.
2. Mind your own finances
You have not lost money on a stock if you don’t sell it. Paper losses and wins are just that. They don’t mean anything.
Recessions, however, can put pressure on your overall finances, and that can force people to sell when they don’t want to. It’s important to head into a recession with enough of an emergency fund to weather any financial downturns you experience outside the market.
That may mean putting off major expenses and being careful in a broad sense. Basically, you want to do everything you can to avoid having to sell good stocks at a depressed price.
3. Buy some recession-proof stocks
Some companies will thrive during an economic downturn. Costco (NASDAQ:COST) and Walmart (NYSE:WMT), for example, sell low-priced goods, and could add customers if a recession hits.
Those brands are not unique. Look for companies that offer value. Consumers still need to eat during a recession, and that may benefit lower-priced grocers, restaurants, and websites. The same applies to clothing and really anything else that people can’t do without.
Be patient, it’s not forever
Recessions happen, but they don’t create a new normal. Eventually, the economy will recover.
If the coronavirus causes a recession, it will likely be a short-term thing. When the threat ends, business will return to normal.
There may be some casualties. A number of struggling retailers may not be able to weather a downturn, for example. For strong companies, though, this will be a bump in the road, a period of weakened results for very explainable reasons.
If you can avoid it, don’t think short-term. Make decisions to protect your portfolio to meet your long-term goals.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
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The Motley Fool has been one of the industry's experts for years and is one of our contributors here at MyWallSt.