Risk #2: a recession
The biggest risk you face if the current economic downturn sinks into an official recession (loosely defined as six or more consecutive months of a shrinking economy) is not to your stock portfolio. It's that your biggest asset, your earning power, might suffer.
If you own your own business, you have to worry about a decline in sales. If you work for someone else, brace yourself for a cut in bonus or commission income - or, if things get really ugly, a layoff.
Over the past 60 years, the unemployment rate has jumped 0.23 percentage points a month during recessions. That might not sound like much, but it works out to an additional 350,000 workers on the street every four weeks. (You'll find advice here on the best ways to lower the odds that you could be one of them.)
As a hedge - just in case the worst happens - the best strategy is to beef up your emergency fund. The standard advice is to keep at least three months' worth of living expenses socked away if both you and your spouse work and six months' worth if your household has only one earner.
But in a recession, a year's worth can make more sense, especially if you're near retirement or find yourself having nightmares about starring in The Grapes of Wrath. If you have no cash or barely any on hand, it even makes sense to sell stocks. It's never a good time to have no savings, and that's especially the case in a downturn.
Recognize, though, that this strategy carries costs. Money you've purposely sidelined won't be in the market should it rebound quickly. If like a lot of people you have some ready cash but not enough to tide you over for an extended period, you can avoid dumping stocks. Instead, put off major purchases, cut consumption and, if necessary, redirect money you're regularly investing in stocks into a savings account.
Where should the money go? Forget CDs: You need to be able to withdraw the money quickly without penalty in an emergency. A money-market account or fund will do. So will the iGObanking.com savings account, which offers FDIC insurance and a yield of 3.5% (as of March 25) that competes with the best money funds.
Send feedback to Money Magazine
