Strategies for Surviving the Slump

by Chris Farrell

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JACOB THOMAS

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Jacob Thomas

Talk of recession sends many of us into a defensive crouch. We cut spending, hoard cash, try to keep our heads down. But for those who are relatively flush and feeling secure at work, the best survival strategy may be just the opposite. Recessions can be a time to pick up bargains, and while hunkering down at work is a natural reaction, a few bold strokes on the job front—raising rather than lowering your profile—is the wiser course of action.

Striking the right balance between safety and speculation depends, of course, on how much you've saved, your age, and how recession-proof your industry is. Whatever the case, "it's a good time to look at your core financial management," says Jonathan Guyton, a certified financial planner with Cornerstone Wealth Advisors in Edina, Minn. "Not just for protection against a rainy day, but to take advantage of opportunities." Here are a few ways to weather, and even profit from, the downturn.

HEDGE AGAINST JOB LOSS

The big fear during a recession is layoffs, and the best move may simply be to try to make your current position more secure. The job-saving mantra we've heard before is one that bears repeating: Network, network, network. Strengthen your connection to your boss and build relationships throughout the company. Fly the company flag at community events and industry conferences. "These are steps you can take to shore up where you stand in the company and find a safe harbor," says John Challenger, CEO of Challenger, Gray & Christmas, an outplacement consulting firm. If you've been telecommuting a lot, consider spending more time in the office. You may also want to make more aggressive financial moves, such as taking out a home equity line of credit even if you don't need it, since it might be tougher to do if you lose your job.

REPOSITION YOUR PORTFOLIO

A starting point in adjusting to recession is reevaluating your assets and their risks. The same basket of stocks and bonds is more volatile today than it was 10 years ago, notes Guyton, since more asset classes now move in tandem. That partly explains the stampede into commodities, since they zig when other assets zag.

With the Standard & Poor's 500-stock index down 16% from its October high, many investors wonder if it's time to cut their losses and sell. Here's the rub: For those not in an immediate cash crunch, it's probably too late. Instead, ask what's driving your winners and if it's time to take profits to invest in other opportunities. "Look at the stuff that's working and ask: Why is that?' and Could it change?" says Guyton.

For example, international stocks have had a great run. The Morgan Stanley Capital International EAFE Index has had an average annual return of 22% over the past five years. That compares with a 12.6% gain in the S&P 500. Yet for U.S. investors, more and more of that return comes from the depreciating value of the dollar in international currency markets. Last year the EAFE index was up 12% in dollar terms but only 4% in local currencies. If the dollar's decline slows or reverses, the driving force behind recent gains is gone.

Another asset class to reevaluate, with an eye to beefing up your exposure, is municipal bonds. After adjusting for taxes, investors in the top federal tax bracket can earn over 7%, vs. 3.5% or 4% on 10- and 30-year Treasuries, respectively.

FEND OFF INFLATION

Guarding your portfolio—and your income—against inflation is also key. The consumer price index rose at a 4.3% rate over the past 12 months and at a 6.8% pace for the three months ending on Jan. 31. But warding off inflation isn't easy these days. Classic inflation hedges aren't very attractive. Gold, precious metals, and other commodities trade at record levels. Investors have poured so much money into Treasury inflation-protected securities, better known as TIPS, that the yield on the popular five-year TIP has gone negative as prices have soared. (Investors buy them with the bet that they'll preserve the value of their investment with the built-in inflation adjustment that the bonds make.)