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3 Things the Smartest Investors Do During a Recession

Many Americans are bracing for a downturn, as fears of a recession continue. The U.S. economy sank for a second-straight quarter, which is often referred to as a “technical recession.” However, we’re not officially in a recession just yet.

The economists within the National Bureau of Economic Research (NBER) are responsible for making the call, and until they reach a decision, this isn’t an official recession. That doesn’t mean investors aren’t concerned, though. If we’re headed toward a recession, there are a few smart moves you can make to keep your money safer.

1. Try not to panic

This is often easier said than done, but try your best not to panic if the country does enter a recession. Economic downturns can be overwhelming and nerve-wracking, but worrying too much can sometimes lead to making less-than-ideal decisions with your money.

Instead, try to focus on the things you can control, and do your best to maintain a long-term outlook. The country has experienced dozens of market crashes and recessions in the past, and we’ve recovered from every single one of them. No matter what happens, it’s extremely likely the economy will rebound eventually.

^SPX data by YCharts.

One of the best things you can do, then, is to stay focused on the future and avoid making any panic-driven decisions. In the words of John Bogle, founder of investment-firm Vanguard and inventor of the index fund: “Time is your friend. Impulse is your enemy.”

2. Double-check your emergency fund

When the economy is shaky, a strong emergency fund is critical. Recessions and stock market downturns often go hand in hand, and job loss is especially common during tough economic times.

If you lose your job or face an unexpected expense, pulling your money out of the stock market can be a risky move. When stock prices are lower, you may end up selling your investments at a steep discount, locking in your losses. However, when you have at least three to six months’ worth of savings stashed in an emergency fund, you can leave your investments alone and rest easier knowing your finances are protected.

3. Keep investing, if you can

Investing in the stock market during a downturn can sometimes feel like you’re throwing your money away. After all, if your portfolio is quickly losing value, it may not make sense to invest even more.

That said, downturns can be one of the best opportunities in which to invest heavily, because you’re getting a bargain. The lower stock prices fall, the cheaper those investments are. If you continue investing when the market is in a slump, you can load up on high-quality stocks for a fraction of the price.

Then, when the market inevitably recovers, you could see significant gains. If you’re looking to build as much wealth as possible in the shortest amount of time, investing during market slumps is one of the most effective strategies. As billionaire-investor Warren Buffet said: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

It’s uncertain right now whether we’re headed toward a recession or not, but that doesn’t mean you can’t prepare. By taking these three steps, you can protect your finances and sleep easier, regardless of what the future holds.

The Motley Fool has a disclosure policy.

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