Try it when the going's good; and it's not very difficult either, says K Ramalingam about recession-proofing your money life.
Illustration: Uttam Ghosh/Rediff.com
Have you protected your investments from recession?
Should you buy an umbrella only after it starts raining? Shouldn't you buy it well in advance? The answers to both these questions are obvious.
Similarly, you need to recession-proof your investments before the first sign of recession hits you hard, shouldn't you?
So, have you recession-proofed your investments? Or, do you want to recession-proof them?
Recession-proof your investments NOW
Just like the setting of the sun, economic hiccups too are an inevitable activity. Even if temporarily, recessions are life's reality. Nevertheless, experiencing recession does not at all signify that you have to participate and get affected by its harmful effects. You can recession-proof your investments.
Planning beforehand can surely help to keep your finances on track during the times of economic slowdown. If you make careful preparations when the economy is pretty stable, you can surely assure yourself of a financial life that is essentially recession-proof.
In the times of economic plunge, implementing some everyday habits can void your fears and help recession-proof your investments.
Let us learn a few significant steps that you can take today to lessen the aftermaths of recession.
Maintain an emergency fund
This is the most important step in making your investments recession proof. To prepare yourself for a potential recession, you should build an easily accessible emergency fund worth three to six months of your expenses.
By not provisioning for such a fund during good times, you are actually setting yourself up for more expenses than required during tougher times. Therefore, it is much easier to build up an emergency fund than to recover from clearing your past expenses.
If the emergency fund is not created, how does it affect your investments during the recession?
During recession, your income could decline; consequently, you may not get loans. So when you need money urgently, you may need to withdraw from your long term investments. Because of recession, your long term investments could be quoting at lower prices.
If you withdraw your long term investments, you may be forced to sell at a lower rate and the notional loss in these investments may become actual loss if you sell them during recession.
By creating an emergency fund, you can avoid this situation. Creating emergency fund does its part to recession-proof your investments.
Create additional income sources
This is the second significant step in making your investments recession-proof. Always remember this thumb rule: your job or paycheck is NOT certain forever.
Even if you are happy with your great-going, full-time job, it is never a bad idea to have an extra income source. This can be accomplished either by doing some consulting work, or selling archives online. With job security becoming non-existent these days, having an additional income source will be of great help especially in times of a downturn.
It is significant to build diversity in your investments to make your investments recession proof. Try to create an investment portfolio in pairs that are not strongly correlated. This implies that the two investments made balance out each other in case of a plunge in the economy.
Diversification, in such times, may be a sound, yet, a very powerful investment strategy in making your investments recession-proof.
Reduce costs and increase savings
Make it a regular habit to live within your means. Doing this, you will less likely incur debts when recession strikes.
Stop wasting your hard-earned money on extra and unnecessary things. Rather, concentrate on additional investments in mutual fund SIPs. Furthermore, clear off your existing debts, organise your accounts and build up your retirement savings. These will help you concentrate on growing your income.
Keep a long term mindset with making your investments. For a long-term strategy, it is important you keep your investments protected from the impact of recession. Rather than putting all your money in the stock market, do some serious investments in high-quality, low-expense mutual funds. This will also make way for a diverse allocation of your investments.
Recession is a short term event. If you have long term investment time horizons, its effect will diminish when the economy recovers. Thinking long term is one of the best ways to keep your investments recession-proof.
Remember, you can't recession-proof your investments once the recession has arrived.
The first best time to recession-proof your investments, is when you receive your first pay-check.
The second best time to recession-proof your investments, is NOW.
Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading financial planning and wealth management company