3 Steps to Escape Portfolio Panic (+ 2 Ugly Mistakes to Avoid at All Costs)

Is a recession coming?

Maybe.

We know recessions are inevitable. And when they’re here… the scary news is blasting on cable 24/7. Your friends, neighbors, and colleagues might be panicking once they see their portfolios dropping.

To make matters worse, it’s unlikely that the next recession will look like the last one, so how do you know what to expect?

But to the savvy (and well-prepared) investor, a recession can be a financial gift.

They allow prices to pull back and bubbles to deflate. Smart investors have the chance to buy on sale and take advantage of bargains when others are panic selling because they weren’t prepared.

The market bottom of the last pre-pandemic recession (2007-2009) was March 9, 2009.¹ But no one knew that at the time. For all investors knew, the market had farther to fall. We only know that was the bottom in hindsight.

It's not likely to be high-flying dot-com stocks or the financial sector that take the economy down next time. Nor will it be subprime mortgages and the bankers who love them. What will it be? No one knows for sure, but whatever it is, it’s coming.

The good news in all the uncertainty is something wealthy individuals have long known: there are juicy opportunities hiding in the dips. Easy enough to say, but what about when the next recession arrives?

The trick is to keep your head level and stay alert. You can find out how to pop open your own “escape hatch” from all the confusion and rescue yourself (and your portfolio) from expensive fear-induced errors.

When you have the right tools, it’s possible to seize opportunities to make money and avoid the ugly mistakes that average investors tend to make during hard times.

This no-nonsense guide is designed for savvy investors just like you, who need a personal strategy to seize the opportunities hiding in the next recession. You’ll learn about the levers you can pull for your own escape hatch.

You may already be asking yourself questions such as:

• Do I have a strategy to keep my portfolio intact even when the news is bad?
• Will I be able to recognize and take advantage of the opportunities just as wealthy investors do?
• What types of financial dangers am I facing?
• Do I have a strategy to maintain my investing strategy even when the economic ride gets rough?
• Will I be able to talk to someone who can help me stay strong through trying financial times?

If any of these resonate with you, keep reading…

Escape Lever #1:

How exposed are you?

Where are you in your own life’s timeline?

If you’re early in your working career and all of your investments are designated for retirement, you’re able to ride out the inevitable recession with a portfolio that’s entirely invested for growth. You just have to avoid panicking and selling out.

In this case, you’re a couple of decades away from needing the money. Staying invested, even through a nasty experience like the Great Recession, can potentially lead to a much larger portfolio later when markets recover.

On the other hand, if you’re closer to retirement, you can’t afford for your entire portfolio to drop right when you need to start withdrawing money. That means having some money in other assets like cash and bonds.

Either way, be realistic about the risks you face.

Cash is not riskless. It can potentially help protect you from stock market drops, but it doesn’t protect you from inflation. In 2022, U.S. inflation reached highs not seen for decades.²

Bonds and other fixed-income investments can also potentially help protect you from stock market drops, but not from interest rate hikes. Keep in mind that you’ll still need investments to help your portfolio’s potential growth over time.

Consider all your risks. Don’t forget that your own human capital is an asset. If your family relies on your income, you may need to look into ways to protect your family should something happen to you.

Key questions to ask yourself include:

• How much of my total assets are subject to recession risk?
• Do I need to do something to mitigate the risks my family and I face?
• Am I prepared to deal with additional risks like rising interest rates or inflation?
• Is there a financial professional I trust who can help me determine the risks I’m facing and how to properly plan for them?

Escape Lever #2:

Flex your flexibility

When it comes to buying cars, clothes, or even vacations, what are the three magic words all purchasers love to hear? “It’s on sale.” Yet too many investors start pushing the panic button and selling when the stock market goes on sale.

The Roaring Twenties may be over soon. In the last century they ended with a severe recession, and there’s no reason to think we’ll get out of this century’s current decade unscathed. But there’s no reason for them to end so badly for you.

Stock dips (and yes, crashes) are the time to scoop up some potential bargains. To paraphrase Warren Buffett, be greedy when others are fearful and fearful when others are greedy.

Just make sure that you’ve still got your cushions against the freefall of the market. Don’t deplete your protection against stock market dips (escape lever #1) or your income generators (escape lever #3) to snatch up sale items. Keep your hedges intact and your income flowing.

Key questions to ask yourself include:

• Are there companies or concepts I’ve always wanted to invest in that are currently too expensive?
• How much availability do I have for going bargain-hunting when the recession arrives?
• Have I developed a game plan for avoiding fear-based transactions?
• Is there a financial professional I can turn to to help me spot opportunities during the next recession?

Escape Lever #3:

Batten down the hatches with diversification

You may have heard of the bucket strategy, with “slices” of your portfolio “pie” invested in several buckets of assets. If you will need some money from your portfolio in less than five to ten years, 100% stocks won’t work.

Money in cash covers the expenses you expect in the next year or so. Another bucket is for bonds, which generate income for you and are designed for the next few years. You’ll also need a stock bucket to hedge against inflation in the long term.

Having the right blend of assets can help you breathe easier and sleep at night when the recession hits, knowing you have enough cash and interest income to keep you going.

That way you don’t have to dip into your long-term investments and potentially sell at a loss. At the same time, you’re not giving up all the growth potential in your portfolio.

Key questions to ask yourself include:

• Will I need to start tapping into my investment portfolio within the next few years?
• Is my portfolio properly diversified so it won’t keep me up all night during the recession?
• Am I able to generate enough income that I won’t need to sell off my stocks when prices are dropping?
• Do I have a strategy to maintain the balance between my investment buckets?
• Is there a financial professional who can help me determine whether I’m properly diversified in the event of a recession?

Ugly Mistake #1:

Investing with your heart and not your head

Contrary to popular belief, acting like an ostrich and sticking your head in the sand may not be a bad way to deal with a recession! It helps to ignore the financial news because it's going to be full of gloom and doom in a recession.

Riding your stocks all the way down to the bottom without selling them can help prevent you from making losses real.

As long as you stay invested, the decrease in portfolio value is only a paper loss. “Buy low, sell high” is a simple concept. But it’s not always easy when your friends, colleagues, and the news anchors are all running around screaming that the sky is falling.

Investing rules help, too. Such as, “I will buy a stock (or mutual fund) that interests me when its price drops 10% below its average price.” Or “I will only sell when the price of my asset is at least 10% higher than it was when I bought it.” Having rules helps you take the emotion out of investing.

It’s very easy to get greedy when prices are rising and fearful when prices are falling. But smart investors find ways to stay out of the fray so they can focus on building wealth for themselves.

Key questions to ask yourself include:

• Do I have strong rules to invest by?
• What is my strategy to ignore the noise when a recession arrives?
• Am I able to keep my eyes on my own wealth?
• Do I have a financial professional to turn to who can help keep me sane and in my lane?

Ugly Mistake #2:

Going it alone

When recessions arrive, things can get real ugly real quick. It’s hard to tell even when the recession has arrived, since the economic data takes a while. Market drops don't always predict one, either. Is a one-day market drop just the start of a massive plummet to the bottom — or is it just a blip?

With so much information available, it’s hard to separate the noise from the signal. Everyone has an opinion about what stock to buy that will last past the recession, which sectors to avoid, how much of your portfolio should immediately be sold into bonds and/or cash, and so on.

Doing it yourself looks fine when prices are on the upswing, because a rising tide lifts all boats. But when the seas get rough, your portfolio may be threatening to overturn during the onslaught. Experienced deckhands can help keep you afloat.

You may notice that wealthy investors ask for help all the time! They have dedicated financial professionals to help them navigate when the economy gets choppy. They’re not trying to figure out everything by themselves, because they recognize when they don’t know what they don’t know.

Key questions to ask yourself include:

• How confident are you that you can stick to your investing path during a recession?
• Have you discussed your investment strategy with someone who’s knowledgeable about markets and recessions?
• Is your current strategy the right one for the upcoming recession?
• Do you have a financial professional who can provide you with the help you need?
• Through hard work and smart investing, you’ve built a solid nest egg. You don't want to lose it by doing the wrong thing when a recession hits. Market drops and crashes can be very frightening when you’re in the middle of them, because neither you nor anyone else knows when the freefall will end.
• Many investors turn paper losses into real ones by making the mistake of panicking and selling at the wrong time — after prices have already started dropping. When recessions arrive, it’s easy to be paralyzed by fear and stop investing completely. This happens even to smart people!
• But it’s different when you understand how to navigate during market drops, and when your escape plan is fully hatched. You’ll be able to spot opportunities and bargains in the chaos and stock up like you’re at a clearance sale.
• It’s critical that you put your escape plan in place right now, before the recession actually hits. If you need to make portfolio adjustments when stocks have already started dropping, you could lose money instead of maintaining your nest egg.
• Wealthy investors know that it’s too easy to get caught up in the fear around a recession, and so they hire professionals to help prevent them from leaping off the ledge. They also diversify their portfolios when necessary, so that they can sleep at night knowing that a stock market drop won’t wipe out the value of their portfolio.
• On the other hand, they’re well aware that having too much in cash or too much in bonds can be detrimental to the growth of their money. Knowledgeable investors keep a good balance between asset classes and understand the risks they’re facing in a recession.
• The good news is that these tools are available to investors just like yourself. You, too, can discover how to create and maintain your own escape plan that can help you navigate the recessions to come — even though no one knows exactly what they’ll look like.
• You probably want to start by working with professionals who have been through recessions and are able to steer clients around the many obstacles that crop up during these times. We understand all the nuances, so we’re able to customize an escape hatch that’s tailored to your personal circumstances. Schedule your complimentary, personalized Recession Strategy Session
• You’ll benefit not only from the experience of our team, but from the customized guidance that we provide specifically for your personal situation. Cookie-cutter solutions just don’t, well, cut it when it comes to the hard times that you’ll be navigating.
• You’ve already taken the first wise step to build your portfolio escape hatch by reading through this guide. Take the next one by contacting us right away to book your own Recession Strategy Session.

Would you like help building your personal portfolio escape hatch?

Book a FREE 1-on-1 Recession Strategy Session

Sources:

1 - https://www.cnbc.com/2019/03/04/the-10th-anniversary-of-the-climactic-march-2009-market-bottom-arrives-this-week.html

2 - https://www.pewresearch.org/fact-tank/2022/06/15/in-the-u-s-and-around-the-world-inflation-is-high-and-getting-higher/