With news warning of a possible recession, many are wondering how they can prepare now, before the downturn. The following seven steps will help you strategically take control of your financial priorities so you can feel more prepared for whatever financial situation awaits. 

1. Track the S&P 500 index, not your account performance
Monitor the S&P 500 over time, instead of closely watching the performance of your portfolio. Write down the number of the S&P 500 Index on the day you want to sell. And, instead of closely tracking your portfolio, track the S&P 500 to see how long it takes for it to recover — to hit a number higher than the one you wrote down. You’ll find that a bear market, on average, is relatively short-lived. Even during the 2008 crisis, the outlier crisis of our lives, the market declined for only 17 months. Indeed, from the lowest point of the crisis, March 9, 2009, until today, the value of equity markets has increased fourfold. And, if you add dividends, you’d have earned an even better return than if you had sold when the market turned.

2. Build two to four years of “safe money”
Dedicate two to four years of income into an investment pool that does not depend upon equity markets to provide income — something as safe as possible. If you need to access funds when the run-of-the-mill bear market comes along, you should draw from the safe money account instead of the long-term investment account. If you don’t yet have a safe money account, then use the next step to incorporate one into your financial plan.

3. Reprioritize your budget
Save more, today. Spend less, today. Try acting on this idea, instead of acting on your portfolio. To weather the bear markets, which are relatively short-lived in comparison to your retirement, you could forego some extravagances for the time being. If you can cut down on spending now, before the bad times, then you’ll be better prepared to cut down when you absolutely need to. 

4. Look at your debt
Today’s financial world is different than any other time in the past for one huge reason: we are seeing very low interest rates, which can be beneficial. Consider a line of credit on your home, just in case. Consider refinancing your home, just in case. Consider a reverse mortgage, if you are of the age and in the situation where that may make sense. In the event of a significant downturn, it may be prudent to use this money before and – perhaps instead of – any other money to make ends meet. Academic research shows that many of us may better outlast the economic storms this way. [1] Conversely, before the bad times hit, you may want to reduce your debt. Fixed expenses — like debt payments — can be crushing to a financial plan.

5. Increase your investments
Times of financial crisis can present investment opportunities. While some investors are fearful, a brave investor may take advantage of the market and invest while the best domestic and global companies are on sale. Simply by turning on “dividend reinvestment” for your existing investments, you can take advantage of this. Even better, a bear market can be an excellent opportunity for you to put otherwise dormant money to work. Known as dollar cost averaging, over time, this idea can make a big difference.

6. Roth IRAs, and Roth Conversions
Often, a bear market means your current investments are on sale. And that means taxes are on sale too. You can Go Tax Free and move your taxable advisory account and/or tax-deferred IRA into a Roth IRA. This decision has the potential to make lots of lemonade, for many years, out of short-term equity market lemons. But you’ll want expert advice to avoid the complications, which leads into the last, and most practical tip.

7. Make a Plan with  a CFP® Professional
The most useful decision you can make to feel financially prepared is to create a financial plan with a CFP® professional, who has a fiduciary duty to honor your best interests. Your financial advisor will consider all these ideas, plus many others unique to your situation, and give you personalized and actionable advice.

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[1] Pfeiffer, Shaun, John Salter, and Harold Evensky. “Increasing the Sustainable Withdrawal Rate Using the Standby Reverse Mortgage.” Journal of Financial Planning 26 (12): 55–62

https://www.onefpa.org/journal/Pages/December-2013-Increasing-the-Sustainable-Withdrawal-Rate-Using-the-Standby-Reverse-Mortgage.aspx