What goes up, must come down. While no one can predict precisely when the next stock market decline will happen, ups and downs over time are the nature of investing. So, ten years into an unprecedented period of stock market growth, how can we prepare for the day the music stops? Have you prepared your investments for a recession?
Investing is core to a healthy Income Generator within your Freedom Generator. Consistent investment through automation and long-term discipline are how you achieve Financial Freedom. But if you’ve never opened your investment account to see your value down 20 or 30 percent, you might not know how hard it is to stick to those simple rules when times are tough.
Here are four steps you can take today, so that when we inevitably wake up to a down market, you have the confidence to stay invested.
Step #1: Reconsider Your Risk Profile
When all we’ve seen in the past ten years is enormous stock market gains, tilting your portfolio more and more towards stocks is tempting. We don’t want to miss out on any growth! But if you’re retired, or nearing retirement, now is the time to rethink your risk profile.
Asset allocation is a proxy for risk. Determining your asset allocation tells you how much you should have in stocks (highest return, highest risk), bonds (lower return, medium risk) and cash. How your portfolio is allocated will drive how much growth, and decline, you’ll see in your assets.
Over the long-term, the best market returns are in stocks. This means if you’re young, won’t need your assets for some time and have a strong stomach, the higher proportion of your investments in stocks the better. Just be sure to be honest with yourself about how much volatility you can handle.
If you intend on living off your assets in the coming years, you need to put some stability into your portfolio. And that means bonds.
Index Fund Advisors has a free questionnaire to help you determine your ideal asset allocation.
Step #2: Rebalance Your Portfolio
Once you’ve revisited your asset allocation, make sure your portfolio actually matches that risk.
Rebalancing your portfolio means reviewing how all your assets are invested today. Sit down and compile all your investable assets. Break out which are in stocks, bonds, cash or alternative investments. Then find the total weighting on each category.
Match your current asset allocation up to your ideal portfolio. What changes do you have to make for your current asset allocation to get in line? If you’re close to the mark, placing new investments into only one of the asset classes for a short period might balance you out. If you’re far off, perhaps sell some of one asset type and use the proceeds to buy more of another.
Don’t want to regularly rebalance your portfolio? Consider a robo-advisor.
Step #3: Automate Your Investments
Consider how much you can invest each month in the pursuit of your Financial Freedom. Then set up automatic withdrawals with your bank or brokerage so you invest your money without lifting a finger!
Automating your finances has many benefits. You’ll save time. And you know you’re always working towards your goal, even when things get busy, and you completely forget about your investments. But one of the most significant benefits to automating investing is removing the temptation to try to time the market.
The more time your money is in the market, the better you do. Investing regularly when the numbers are trending up is fun. Knowingly placing your hard earned cash at risk in a down market is much harder. But that’s when you get the most bang for your buck!
So automating your investments protects you from yourself and keeps building your Income Generator—even when your emotions might otherwise hold you back.
Step #4: Start Developing Your Income Generator
With your investments now aligned with your goals and set to run on autopilot, the last step to preparing for a recession is doubling down on building a strong Income Generator. Take the time now to start developing another source of passive income.
Working on an Income Generator today has two key benefits in preparing you for a recession. First, you’re less reliant on your investment portfolio. Your focus and worry about declines in your investment assets will be significantly lower if you know you have cash coming in from other means.
Second, that extra source of income gives you cash to invest when the market declines. You’ll be able to make the most of a recession by bolstering your investment portfolio and further expanding your Income Generator. With patience and discipline, you’ll lay the foundation for a lifetime of Financial Freedom!
Stick To Your Plan
Investing is a long-term game. The market will have periods of decline and periods of growth. But the smart investor rides the wave through it all. Follow the four simple steps above to solidify your investment plan while things are rosy. And when everyone else is panicking that the sky is falling, you’ll know your future is safe.
The views and opinions expressed are those of the guest author and do not necessarily reflect the views and opinions of MindShift.money.
image credit: Bigstock/Bernie123
Chelsea Brennan is a former Wall Street financial analyst and investment manager who changed gears in her career to chase her passion of improving financial literacy and independence. She is now a personal finance writer and content marketer. Chelsea shares her obsession with budgeting, investing, and raising financially smart kids at MamaFishSaves.com.