3 Ways to Become Recession-Proof

In the midst of the longest running bull market in U.S. History, the Dow Jones Industrial Average hit an all-time high at closing with a record of 27,359.16 on July 15th, 2019.

On July 31st, the Federal Open Market Committee voted to lower the target range for the fed funds rate to 2.00%-2.25%. The following day, the Wall Street Journal prime rate officially decreased to 5.25%. The theory is that this rate cut works like “insurance.” It was a decisive act to keep economic growth on track before a recession has a chance to develop.

On August 14th, the Yield Curve became inverted, which is a tale tell warning of a looming recession. The yield curve displays the spread between two and ten-year Treasury yields. When this spread falls below zero, an occurrence that’s preceded each of the last seven recessions, then the yield curve inverts.

While none of this should be cause for panic or trigger irrational responses, it is worth being aware of what stage the economic cycle is in, and which direction we are likely headed. A downturn is inevitable. The key questions are: Has a recession already begun? And, if not, when will it occur? 

An economic downturn is inevitable, but a reduction in your bank account does not have to be. Here are 3 Tips to becoming recession-proof:

1.    Add Another Stream of Income

You may have a great full-time job. Perhaps you already have multiple income streams. Great. Add another one. Maybe you already have a side hustle that adds to your income, but can be time-consuming and is dependent on you being present to make money. Consider acquiring an investment property that will provide you with passive income, while increasing your net worth.

2.    Understand Your Risk Tolerance

Many investment advisers will tell people in certain age ranges to allocate their investment portfolios a particular way predicated mostly on age. For example, a common adage is: “If you are younger, you can afford to take more risk. Therefore, you should have a higher percentage in stocks that may have a higher range of risk/return than other stocks or bonds.” While this isn’t always bad advice, it is a generalization which does not work for every person in each scenario. Assess your own risk tolerance. Are you aggressive and willing to take larger losses when markets decline, but also capture more return during bull markets? Or, are you more risk averse and willing to cap your returns, but also reduce the probability of large losses? Depending on your risk assessment, it may be wise to reallocate your investment portfolio.

3.    Nourish your Credit Score

When markets contract and credit approvals tighten, those with higher credit scores are likely to get approved for the best terms/rate for a mortgage, business, or other investment loan. One way to quickly improve your credit is pay down your credit card to zero balance and keep the account open. This will lower the ratio of credit utilization to available credit, and can quickly increase your score. It will also free up some cash that is no longer going to making minimum payments that include 20%+ interest on the revolving balance.