These 2 Moves Could Make it Easier to Ride Out a Recession

If you’ve been investing for quite some time, you’ve probably experienced your fair share of stock market corrections and a recession or two. And if you’re new to investing, buckle up. At some point in time, a stock market correction is likely to ensue. And it has the potential to throw you for a loop.

If you’re not familiar with stock market corrections, it’s when the market falls at least 10% from a recent high but drops less than 20%.

There are a lot of different things that can fuel a stock market correction, and sometimes, they can come on without warning. Sometimes, economic concerns are enough to trigger them, though it’s possible to experience a stock market correction even when the broad economy is in great shape.

During a stock market correction, your portfolio value is likely to take a tumble. But if you play your cards right, you can avoid actual losses. Here are two moves that could help you more easily ride out a market downturn.

1. Diversifying your portfolio

A diverse investment mix won’t necessarily protect you from losses during a stock market correction. But what it might do is make those losses less extreme.

There are a number of steps you can take to diversify your portfolio. First, you could simply load up on assets that give you exposure to the broad market, like a total stock market or S&P 500 ETF.

Secondly, you could load up on sector-specific ETFs across a range of industries. For example, you might add some tech ETFs, healthcare ETFs, and auto ETFs to your personal investment mix.

Within your portfolio, you should also make some room for stable investments, like bonds — even if you’re fairly young and won’t be using your portfolio for quite some time.

It’s also a good idea to hold some income-generating investments in your portfolio. Bonds fit the bill, as do dividend stocks.

When you have assets that are generating income, it can help offset losses. Plus, that’s income you can use to scoop up shares of different companies while they’re discounted during a stock market correction.

2. Having a robust emergency fund

As a general rule, it’s important to have enough emergency savings to cover three to six months of essential bills. A solid emergency fund could not only help you avoid debt in the event of an unplanned expense or unemployment, but it could also protect you from portfolio losses during a stock market correction.

Let’s say you don’t have emergency savings and you wind up out of a job. You may have to tap your portfolio for income while you look for work.

But if you have an emergency fund, you can potentially leave your portfolio untouched while its value is down. This allows you to avoid making your losses official.

If you leave your portfolio alone and cover your costs in cash, you may find that you’re in a better place by the time the market recovers.

All told, stock market corrections are something every investor should expect. But if you manage your portfolio and finances carefully, you’ll be better equipped to get through a correction without negative long-term repercussions.

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