Risk #2: a recession

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By George Mannes, Money Magazine senior writer

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.)

The best hedge: cash

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

Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
Top-paying jobs Orthopedic surgeons take home a median $410,000 in salary and bonus annually. What other great careers from CNNMoney and PayScale.com's list of Best Jobs in America offer hefty paychecks? More
Fastest-growing jobs Demand for IT security consultants are projected to grow a solid 37% between 2012 and 2022. What other careers on CNNMoney and PayScale.com's list of America's best jobs will see big opportunities? More
Best Jobs in America CNNMoney/PayScale's top 100 careers with big growth, great pay and satisfying work. More


Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2015 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2015. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2015 and/or its affiliates.