7 Ways To Prep for the Next Downturn
“Only when the tide goes out do you discover whos’ been swimming naked.” – Warren Buffet
When it comes to the world of investments, if skinny dipping is your thing, more power to you. But for those who cringe at the thought of what the receding tide may show (i.e. ugly portfolio losses), rather than dashing for cover when it’s too late, below are seven things you can do to prepare for the next market downturn.
1. Revisit Your Emergency Fund
This is often the starting point when we start working with new clients. Before we can determine how much risk to take, how much to invest, and what to invest in – we need to set the groundwork for a strong foundation. Life happens, and whether it’s loss of employment or a new roof for the house, having an emergency stash of funds will be your biggest ally during a downturn. Quick rule of thumb: 3 to 6 months of living expenses in an FDIC insured high yield savings account.
2. Trim the Fat
In today’s “subscription based” world, it’s easy to rack up large amounts of recurring expenses. As I described in this recent article by GoBankingRates, on an annual basis it’s a great idea to review your expenses. An easy place to start is the year-end summary most credit cards offer. Take a glance and eliminate any services you don’t really use.
3. Get Rid of High Interest Debt
In a nutshell, if your bank isn’t paying you 17% (hypothetically), why are you paying (insert favorite credit card company) that much? Turn the ship in your favor, and start hacking away at any debts that carry large, variable interest rate charges.
4. Re-price Other Items
Refinancing isn’t just for your home mortgage. While definitely something worth looking into given the historically low interest rate world we’re currently in, it’s also a smart idea to re-price other items. Car insurance premiums are often a prime suspect on this list. If you’re on auto-renew, it’s easy to dismiss price hikes. Shop around and do your due diligence at least once every other year.
5. Pull Your Annual Credit Report
Access to credit reporting and credit scores have improved substantially the past few years. The first place to consider starting is your existing credit card company. Most will give you an estimate of your credit score. Notice something fishy? Keep in mind you’re entitled to one free copy of your credit report every year from each of the credit bureaus.
6. Buy on Discount
An oldie but a goodie – if markets are down, it could be a good time to put money to work. Provided your monthly cash flow allows for it, consider Increasing the amounts you invest in your workplace retirement plan (401k, 403b, etc). As long as your focus is on the long term, it’s hard to argue with the historical returns that most equity markets provide (of course, this is provided that item #1 on this list is taken care of).
7. Review Your Estate Plan
The age old concept of “crossing your T’s and dotting your I’s” isn’t just for older folks. Anyone of any age can benefit from some basic concepts of estate planning. Ensuring your loved ones receive what they’re entitled to will go a long way in demonstrating you care for them.
Markets give and take, expand and contract. Understanding the long term tendencies and behaviors of the markets can help put you at ease. Rather than react in haste, it’s often best to focus on the factors you have control over. Over the long run, you’ll be rewarded.