Recession fears are rising. Here’s how to find financial stability

Watching a one-day, 800-point bloodbath on Wall Street gives even the most sophisticated investor reason to come unhinged for a little while. 

Is a recession around the corner? Or a year or more away? Just how far can the stock market — which has been roaring along for much of the summer — tumble? 

The Dow Jones industrial average closed at a record high of 27,359.16 points on July 15 — a 17.3% year-to-date gain. 

By Aug. 14, the day of the 800-point drop, the Dow had fallen to 25,479.42 points, representing a 6.8% decline in a month. 

Who’s got the stomach for that? 

It’s time to regain your financial footing, step back and decide what moves make sense if you’re worried about the next recession. Here are questions to consider: 

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What am I doing with my money now? 

Take a close look at how you’re investing your money already. You might not realize the level of risk you are taking.

If you’re prone to panic, pay attention to this one. 

Say you are in your 30s and you took a new job in the past few years. 

About 35% of employers now automatically enroll a new employee in the company’s 401(k) plan, according to Fidelity Investments. That process was made possible by the passage of the Pension Protection Act in 2006. 

Now, if you didn’t choose how to invest the money, most of the time — nearly 68% of plans — your 401(k) automatically will be invested for you in target retirement date funds, according to the latest data from the Plan Sponsor Council of America. 

“Most people don’t consider themselves to be sophisticated investors,” said Katie Taylor, vice president of thought leadership at Fidelity in Boston.

So, she said, the target date fund can fill that gap by offering a pre-packaged  mix of stocks, bonds and cash that takes on more risk when you are younger. Over time, the fund gradually rebalances as you age and move closer to retirement. 

The theory is the younger you are, the more risk you can afford to take. 

Target date funds are far more common in 401(k) plans today than they were during the stock market meltdown in 2008-09. They’re not a perfect solution; some can have higher expenses, for example.

But a target date can help someone who is stumped when it comes to building their own mix of stocks and bonds to create a balanced portfolio, said David M. Blanchett, head of retirement research for Morningstar Investment Management in Chicago.

How much risk can I stomach? 

If you’re young, a target date fund takes on a good deal of risk. 

Someone who plans to retire in 30 years, for example, might automatically be investing all their 401(k) money in a Target Date 2050 fund.

The catch: A target date 2050 fund might have a mix of 90% stocks and 10% bonds.

Yes, you could be investing 100% of your money into a fund that’s 90% stocks. 

It’s fine if you’re comfortable holding on during a bear market — when you’d be buying stocks at lower prices anyway. But if you’re not willing to look at huge losses on your statements at some point, you could sell out at the wrong time.  

What’s the financial — and psychological — risk? What happens if you’re hyper-sensitive to a 20% or 30% loss in your retirement savings? 

If you know you couldn’t stand losing that much money, you could pull back some risk, Blanchett said, and opt to put money in a more conservative mix of investments that’s geared for someone nearing retirement. 

A Target Date 2025 fund, for example, might have a mix of 65% in stocks and 35% in bonds. Target funds offered through different mutual fund companies offer a different mix. 

Remember, you’re not required to invest in a target fund that’s closest to your expected date of retirement. 

What you’re trying to do is keep investing and find a level of risk that can help you avoid panicking when the stock market tumbles. 

Should I move some money around in my 401(k)? 

Maybe — or maybe not. 

“My first response is don’t do anything,” Blanchett said. “It’s really hard to time the market.” 

Someone who has 20 years or more before they retire has time to recover from a selloff in the stock market.

Someone who just retired should take into account that they could live another 20 years or more. Most experts say you don’t want to put all your savings in a money market account, which won’t offer big returns. 

“Personally, I think you should have as much in equities as you can stand,” said Kevin B. Granger, senior vice president and senior investment adviser for PNC Wealth Management in Troy. 

Many people in their 30s or 40s, though, only remember the bear market that ran from October 2007 through March 2009. The Standard & Poor 500 index lost about 50% of its value. Many people lost their jobs, saw homes go into foreclosure and lost a good deal of their retirement savings. 

The Great Recession was truly brutal. But the next slowdown might not be as bad. 

“Recessions aren’t always deep,” Granger said. “Who knows what the next one might bring?” 

Realize that there can be more modest downturns for stocks and still prepare accordingly. 

“Individuals have to have a game plan for what they’re comfortable with,” Granger said. 

So if you’re really, really nervous, experts acknowledge that it’s OK to take some simple — not drastic — steps to take a little risk off the table. 

Experts suggest: Lock in some gains in long-term bond funds or some higher-flying stock funds and set some of that money aside in short-term bond funds. Look at dividend-paying, blue-chip stocks. 

How do I know if the wild ride on Wall Street is over? 

The Dow regained some ground in less than a week, rebounding Wednesday to close at 26,202.73 points. 

Even so, the market fallout in mid-August was hardly a so-what moment. 

No doubt, we can expect more volatility in the months ahead as Washington and Beijing try to find a way out of the trade war. And of course, the recession threat continues. 

“Right now, the underlying economy still appears to be relatively strong,” said Keith Harder, a principal and financial adviser in wealth management at Rehmann in Troy. 

But concerns about a possible global recession, as well as uncertainties about tariffs, could trigger other triple-digit losses at some point. 

“The trade negotiations are a pretty critical thing in this,” Harder said. 

For someone who is retired, he said, it’s important to have enough cash in a safe spot, such as a money market fund, to cover about two years of income that someone may need to withdraw soon out of retirement savings. 

“What we want to avoid when we’re in a distribution phase is selling at a loss,” Harder said. 

Investors need to take into account how their money is invested now, as well as their short-term and long-term plans for their retirement savings. 

Is it time to pay down debt?

Now, there’s a thought. 

If a recession is in the cards — and the jobless rate climbs higher — you don’t want to be looking at a stack of old bills that you could have addressed when times were good. 

If you’re paying a 25% annual rate on credit card debt, you can save a good deal of money by tackling that debt and paying it off as quickly as possible.

How nervous should I be? 

We are seeing some signs of economic trouble ahead.

U.S. Steel Corp., for example, will temporarily lay off hundreds of workers at its Ecorse facility because of “market conditions and recent reductions in customer demand.” The layoffs, which could last more than six months, reflect weakening demand for steel from the auto industry and farm machinery business. 

Some market watchers still expect that stock prices overall could head higher in the next six months to 12 months. But the same can be expected when it comes to higher levels of volatility, according to Sam Stovall, chief investment strategist for U.S. equities at CFRA Research in New York. 

It’s possible that the Federal Reserve could cut rates a second time in 2019 at the next two-day policy meeting on Sept. 17-18, giving the economy a boost too. 

All bear markets — and all recessions — aren’t as horrific as what we witnessed more than 10 years ago. 

“Not every downturn is created equal,” said Matt Dmystryszyn, director of investments at Southfield-based Telemus.

The U.S. economy isn’t facing the same financial risks now that it did before the Great Recession, he said. Consumers aren’t overloaded with debt. The housing market isn’t in a bubble. A recession isn’t imminent. 

“The softness in the economy is really stemming from trade and the slowdown overseas,” Dmystryszyn said. 

If a resolution in the trade war between the United States and China is reached, he said, stocks could go up, not down. 

“You have to have one foot in and one foot out right now,”  Dmystryszyn said. 

Contact Susan Tompor  at 313-222-8876 or stompor@freepress.com. Follow her on Twitter @tompor. Read more on business and sign up for our business newsletter.