How To Protect Your Money In A Depression

Five ways to shield your money from recession

— -- The classic definition of a recession is when the nation suffers two consecutive quarters of declining gross domestic production. But to non-economists, recession ways higher unemployment, lower interest rates and hard times — particularly if you're retired or nearing retirement.

You tin can guard confronting the worst furnishings of recession, though, if y'all follow a few simple steps.

Consider these 5 strategies: Build upwards some greenbacks. Avoid the temptation of high-yield securities, such as junk bonds. Look for bargains in the stock market that pay solid dividends. If you're nearing retirement — or are semi-retired — gear up for the possibility of losing your chore. And if you're actually worried, spend some of your retirement money on a financial planner.

Cash isn't trash

In Wall Street parlance, "cash" is any investment that can be turned quickly and painlessly into spending money. Your money market account at a banking concern, for case, is considered cash. And so is your money market mutual fund. Treasury bills and other short-term involvement-begetting investments are considered cash, too.

Thanks to the Federal Reserve Board's recent series of interest-rate cuts, yields on cash investments are somewhere betwixt very depression and minuscule. A 3-month Treasury pecker yields a scant two.ii%. The average coin marketplace fund yields more — iii.4% — only such yields volition be falling in the next few weeks equally the funds replace their older, higher-yielding investments with new, lower-yielding ones.

Still, cash remains 1 of your best investments in a recession. Why?

•Safety. A 2% yield looks pretty good compared with, say, a ten% loss in the stock marketplace.

•Liquidity. Your biggest risk in a recession is the loss of your chore, if you lot're yet employed or semi-employed. If you demand to tap your savings for living expenses, a greenbacks account is your best bet. Stocks tend to suffer in a recession, and you lot don't want to accept to sell stocks in a falling market.

How much of your portfolio should you have in cash? If y'all're however working, you lot want greenbacks equal to almost three months' worth of living expenses in a non-retirement account. (You'd pay tax and penalties if you took an early withdrawal from a retirement account before age 59½.)

But that's a very rough rule of thumb, says Louis Barajas, a financial planner in Santa Fe Springs, Calif. If you're in the financial-services industry, for example, yous might want to keep six months' salary in cash, because information technology might have you awhile to find a new task. If you're a nurse, you can probably keep less in cash, Barajas says, because nurses are in high demand, fifty-fifty in a recession.

If you're retired, you should probably keep nigh a twelvemonth'south worth of living expenses in greenbacks. The average bear marketplace lasts 404 days, or a bit more a year, according to Jeff Hirsch, president of the Hirsch Organization, which publishes the Stock Trader'south Almanac. Taking withdrawals from your stock portfolio in a bear market volition but exacerbate your losses.

Don't reach for yield

When the economic system slows, the Federal Reserve tends to lower short-term interest rates to effort to get business bustling again. That's great if you're a borrower. Information technology's rotten, though, if y'all live off your savings. Just don't be tempted by high-yielding investments. At best, they're risky. At worst, they're a scam.

The ten-yr Treasury yields 3.76%. That'south how much you can earn without risk for a decade. It'due south not much.

You tin can get higher yields by accepting more than risk. The question is: How much yield is enough? A ten-year, top-rated municipal bond yields 3.63%, co-ordinate to Bloomberg. Municipal bonds are long-term IOUs issued by states, counties and municipal organizations, such as toll roads and airports.

That'south an exceptional value, considering interest from municipal bonds is gratis from federal and, sometimes, local taxes. If you lot're in the 25% federal tax bracket, you'd take to earn 4.87% earlier taxes to earn the equivalent of a 3.63% tax-gratis yield.

And the take a chance is low: Defaults are rare. Only about 0.3% of investment-class munis default each year.

Yous can also score higher yields from high-run a risk junk bonds, which are issued by companies with shaky credit ratings.

Junk bonds now yield nigh 10%. Only the chance that a junk bail will default is high — in which case you'd receive but pennies on the dollar.

Be wary, also, of con artists pitching loftier-yield investments such equally "prime bank CDs." These are billed as CDs that just elite banks sell to each other. But they're just a way for scamsters to take your coin.

Consider dividends

If you're investing for retirement and can tolerate the hazard of stocks over the long term, check out stocks with decent dividend yields. Dividends are vital. For one thing, they're a crucial part of overall stock market return. Over the past 30 years, the South&P 500-stock index has gained 1,445%. Had you reinvested all your dividends, though, y'all would have gained 3,751%.

Reinvesting your dividends over the long term is likewise a great way to build up a stream of income in retirement. Let'southward say you bought 100 shares of Consolidated Edison, an electric utility, 10 years agone. You would have paid $3,794. Ten years later, thanks to reinvested dividends, yous'd accept about 170 shares. Your total investment — including stock price appreciation — would exist worth almost $7,400.

Companies pay dividends based on how many shares you ain. So having 70 more shares will have boosted your dividend payout. In the showtime twelvemonth that you bought the stock, Con Ed paid $ii.12 per share; yous'd have received $212 in dividends. Had the dividend stayed the same and you had reinvested your dividends over the past ten years, you would accept earned $360 in dividends.

Merely Con Ed, like many companies, has raised its dividend regularly. It paid $two.34 last year, boosting your payout to $398 ($two.34 times 170 shares).

Companies that consistently enhance their dividends give an investor an border over bonds. A bond'southward interest rate doesn't change. And over time, inflation erodes the value of a bail's interest payouts. But a company that often raises dividends tin can help you whip inflation.

Program for the worst

What's the worst that could happen in a recession? If you lot're nearing retirement, your biggest fear is probably losing your task. Not only would y'all lose income; yous might also have to draw down your savings to make ends run into while yous look for work.

Rising unemployment, unfortunately, is a hallmark of a recession. Then information technology'southward best to take stock of your finances and see how well you'd fare if you were laid off.

You should view recession warnings as a kind of wake-up telephone call to review your family'southward balance sheet.

"We become more cautious about how we spend," Barajas says. "We're more aware of impulse ownership and ask ourselves if we really need something."

Rather than make large new purchases, it's amend to pay down debts, particularly high-involvement credit card debt. Yous'll increase your cash period — and, if necessary, benefit from a larger credit line for emergencies.

Make a programme

Finally, develop a plan for your portfolio that suits your goals: retirement in five years, for case. Don't let the short-term terrors of the stock market scare you lot into making drastic moves, such as yanking all your coin out of stocks and pouring it into cash.

"If you have a skillful asset resource allotment, you have bull and comport markets baked into the recipe," says Ray Ferrara, a Tampa-based financial planner. "Ane of the biggest mistakes is to move abroad from a bailiwick that has served y'all well."

A good nugget allocation means that, from time to fourth dimension, you lot'll have to rebalance, moving money from investments that have performed well into those that have washed poorly. Barajas, for example, has shifted money into real estate funds, which have been clobbered over the past 12 months.

If you don't know how to make a financial plan, consider investing in i. You can find fee-simply financial planners at world wide web.napfa.org. And call up that recessions somewhen pass. "Nosotros're going to have recessions and down markets," Ferrara says. "Merely there are going to be more good times than bad times."