How to manage your money during a recession, according to personal finance experts

From the war in Ukraine and rising interest rates to sky-high inflation and falling economic growth, warning signs of a potential economic downturn are plentiful—to say the least—and both Wall Street and main street have taken note.

Billionaire investors like Carl Icahn and Leon Cooperman were some of the first to sound the alarm about the increasing potential for a U.S. Recession, but now, former Federal Reserve officials and top investment banks are adding to a growing chorus of recession predictions.   

Wall Street’s consistent warnings have led 81% of U.S. Adults to say they think the U.S. Economy is likely to experience a recession this year, according to a CNBC survey, conducted by Momentive. And a recent Reuters poll showed that 40% of economists believe the U.S. Economy will fall into a recession within the next 24 months. 

If they’re right, investors should be prepared for the worst. Here’s what a few top investment advisors recommend investors do to protect their portfolios in a worst-case scenario.

Think long-term and follow an investment plan

First and foremost, investors should think long-term in times of economic turmoil, and stick to their investment plans. Actively investing in stocks and properly timing market downturns is a difficult game—just ask hedge fund managers.

From 2011 to 2020, a simple investment in the S&P 500 returned almost three times as much as the average hedge fund, according to data from the American Enterprise Institute.

“Investors should be investing for the long term based off a financial plan looking at their risks, goals and time horizons,” Brett Bernstein, the CEO and co-founder of the financial planning firm XML Financial Group, told Coins2Day. “If a recession were to come, it’s more about maintaining the appropriate asset allocation and making tweaks to the portfolio based on the current market conditions.”

Avoiding panic selling is key to long-term investing success, experts say. After all, going back to 1927, if an investor put $100 in the S&P 500 and stayed invested, their portfolio would have been worth over $16,800 by May 2020. But missing the 10 largest daily stock market rallies would cut that value down to just $5,576, according to UBS.

 “Clients should be comfortable with their allocations and not try to change them once a recession begins,” John Ingram, CIO and Partner of the investment advisory and wealth management firm Crestwood Advisors, told Coins2Day. “Given the tendency for investors to sell near stock market bottoms (and miss the market’s rebound), ‘de-risking’ portfolios to protect capital will likely lose money as clients turn a temporary market loss into a permanent one.”

Safe-haven assets

That doesn’t mean investors should simply sit on their hands during a recession, however. There are so-called “safe-haven assets” that can help reduce portfolio risk. But experts say it’s critical to get into these assets before a recession begins, not after.

“Since markets discount the future, investors need to take action before the recession hits.  A healthy dose of cash as well as bonds with a short maturity (2 years or so) would offer protection,” J. Douglas Kelly, a partner and portfolio manager at Williams Jones Wealth Management told Coins2Day.

Joseph Zappia, the co-chief investment officer at the investment advisory firm LVW Advisors, also said acting before a recession begins to protect savings is critical. He recommended investors look to series I savings bonds, which are backed by the U.S. Government and return the rate of inflation on an annual basis, to protect their portfolios as consumer prices soar.

“It is more about having a plan before a recession. The old adage that Noah did not wait for it to start raining before he built his ark rings true now,” Zappia said.

Then there’s the most common safe-haven asset of all, gold. Gold tends to outperform stocks in times of economic turmoil, data shows. For example, during the Great Recession, the value of gold increased dramatically, surging 101.1% from 2008 to 2010, according to a report from the Bureau of Labor Statistics.

“As a safe haven asset, a small allocation to gold could have a meaningful impact to overall portfolio volatility and performance for long-term investors who seek stability in negative market environments and exogenous shocks to the capital markets,” Jeff Wagner, a senior partner at  LVW Advisors, told Coins2Day.

Diversify your portfolio

A well-diversified portfolio is another way to help prevent serious losses during a recession, experts say.

“The sage advice is to build a portfolio that can weather the volatility by being well-diversified (including fixed income, equities, alternative investments, private equity, and real assets),” Jon Ekoniak, CFP, a managing partner at the independent investment advisory firm Bordeaux Wealth Advisors, told Coins2Day.

While many investors have flocked to high-flying tech stocks and exchange-traded funds over the past few years, it’s important to remember that historically, the tech-heavy Nasdaq has underperformed during recessions. 

The index fell more than 80% following the dot-com bubble over the course of a few years, and during the Great Recession, it sank 46% from November 2007 to November 2008 alone.

That’s why it may make sense to focus on diversification, and look to alternatives to reduce losses.

“A well-diversified portfolio of quality stocks, safe fixed income including inflation-protected U.S. Treasury securities, and diversifiers such as real estate (or other alternatives for qualified investors) can be helpful in reducing losses,” Zappia said.

Remember that not every recession is the Great Recession

While recession fears are spreading like wildfire, it’s also helpful to remember that not every recession is as painful as the Great Recession.

“It is important to distinguish between the differing severity of recessions,” John Ingram of Crestwood Advisors said. 

Ingram noted that the Great Recession of 2008/09 was a banking crisis that led to a deep, long-lasting recession. But in today’s economy, U.S. Banks’ balance sheets remain strong, which makes it “unlikely” that the U.S. Will experience the type of recession it did then.

“Clients should understand that given the low growth outlook, recessions may become more common and will, most likely, be less impactful to portfolios than the 2008/09 Great Recession,” Ingram explained. ”Perhaps investors can move past some of the fear associated with recession.”