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In this slowing economy, how can you protect your money from the four major financial risks associated with the an economic slowdown?

In this article, I will take a look at a few tips that were offered by Money Magazine, and add my own recommendations for mutual funds that have worked very well for me.

Inflation

Inflation erodes your investments and hurts your purchasing power. To protect your investments, allocate a percentage of your portfolio into a natural resources fund. I’ve been very happy with T. Rowe Price’s New Era PRNEX. Do keep in mind that the fund is not risk free, especially after gaining nearly 30% a year for five years.

Recession

A recession is loosely defined as six or more consecutive months of a slowing economy. The biggest risk in a recession is not necessarily to your investment portfolio – your portfolio should bounce back nicely in the bull market that will follow a bear market.

The biggest risk in a slowing economy is earning less, losing customers, or being laid off. The best way to prepare is by having a well-funded emergency fund. Three months’ worth of living expenses is a minimum. A full year makes a lot of sense during a recession. Money should be completely liquid, so a money market account is a better choice than a CD. Another option is a high-interest savings account such as the ING Direct Orange Savings Account.

Dollar collapse

The best hedge against a dollar collapse: a foreign stock fund. We hold at least 20% of our portfolio in foreign stocks. We’ve been very happy with Dodge & Cox International Stock Fund (DODFX). Again, no guarantee as to future performance. We also have some exposure to China, Japan and Europe, in addition to holding Vanguard’s Emerging Markets Vipers (VWO).

Credit Crunch

In a slowing economy, it is getting more and more difficult to get a loan – mortgage, car, even a credit card. If you are a homeowner and have enough equity in your home and a decent credit score, you can set up a HELOC (home-equity line of credit) now as a safety net for an uncertain future. Personally, I hope that a tightening credit situation will finally nudge Americans in the direction of borrowing and spending less, and saving more.

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I am not a financial adviser. Prior to taking any action, please do your own research.

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