How Stock Market Gurus Prepare for a Recession

The stock market tends to abide by the laws of gravity, sort of. With stocks, whatever goes up must come down. When it comes down, it can be a market correction or a recession. In recent years, talk about a recession has been getting increasingly louder, especially with Donald Trump's economic policy being the way it is.

Eventually, a recession can and will hit America. It's going to happen sooner rather than later, and that means that you will need to prepare for a recession. What better way to do that, than to listen to what Wall Street gurus have to say about the matter?

We decided to find out what each major trader had to say about prepping for recessions. Here's what they said.

Invest in "recession-proof" businesses.

Among many Wall Street greats, they have a saying. That saying is, "When the going gets tough, the tough buy Kraft." What this saying means is that you should buy stocks in companies that people will continue to buy and need through the recession.

People will always need food basics, and they will also need electricity, gas, and cleaning products. Companies that offer these are very unlikely to go out of business, and will usually escape a recession with minimal damage. As a result, it's one of the easiest ways to prepare for a recession.

While you're at it, you may want to go through your portfolio and dump anything risky.

Whether you want to invest like Warren Buffett or invest like Ray Dalio, the crux of your strategy will always be to pick stocks that are high quality. Buffett himself pointed out that the best way to prepare for a recession is to invest in quality stocks beforehand.

Seriously look through your portfolio hard before a recession hits. You want to see indicators that your stock is undervalued, or that the company you want to invest in handles its money well.

A company that takes a lot of risks or is in a shaky industry will not fare too well in a recession. Above all, avoid trying to get into any of the most dangerous investments you can make.

Start putting together a savings account, and stock up on savings as much as you can.

Do you remember how bad the last recession was? During the Great Recession, most people saw their life savings wiped out due to a job loss, a sudden tragedy, or other factors. That's why most experts will tell you that it's time to consider saving up at least six months' worth of savings.

This is one of the easiest ways to prepare for a recession without having to worry about too much "what if's" along the way. Money will always be useful, after all.

Start working some side gigs.

The thing about recessions you may need to be aware of is that it doesn't just affect stocks; it affects the job market too. During the Great Recession, jobs were few and far between. Many people even ended up giving up hope of making ends meet because of how badly the job market treated them during this time.

The best way to cushion the blow of a recession-based job loss is to have your own side gig or even start your own side business. With some luck, you will have enough money to make your lifestyle affordable even without your 9 to 5.

Mentally prepare yourself not to panic-sell.

"You get recessions. You have stock market declines. If you don't understand that's going to happen then you're not ready, you won't do well in the markets." - Peter Lynch

Panic-selling is the most common reaction people have to the stock market once a recession happens. It's also one of the fastest ways to lose money on stocks and send your personal finances into a freefall.

If you have a tendency of having knee-jerk reactions to seeing your stocks dip, you might want to take a cue from Warren Buffett. He advised to just kick back, grab some ice cream, and relax.

Start to pay down debt once you've gotten your savings sorted.

Savings alone won't be enough to prepare for a recession. During an economic downturn, credit card companies tend to raise the rates that they offer—and that can put some serious pain on your paycheck.

Think of paying down debt as an investment. By paying that debt down now, you're reducing the amount of money you'll have to spend later on, which in turn can be used for investments.

You also should prepare to keep investing.

Contrary to popular belief, you shouldn't stop investing during a recession. If anything, investing during a recession might be the best way to see major improvements once the market heals once more. Warren Buffett actually called it, "bargain hunting" because of how undervalued many stocks are.

The concept that works buying stocks to your advantage is known as dollar-cost averaging. By buying stocks regularly, regardless of the current economy, your losses average out. When the economy recovers, you get a bigger profit from the stocks you bought.

Think of it as one of the time-oriented forms of diversification.

Consider getting other forms of passive income.

It goes without saying that you should work to be the kind of employee an employer will want to keep during a recession. However, that doesn't always work out. Sometimes, companies will fold regardless of what you may try to do to help them out.

To prevent yourself from drowning in joblessness, you should consider getting another form of passive income. Perhaps buying up some artwork, or getting a vending machine could work? There are many forms of passive income you can try.

Clean up your 401(k).

Your 401(k) may be company-managed, but that doesn't mean that you don't have a say in what goes into it. If you're nearing retirement and see a recession on the horizon, you might want to switch to safer stocks, bonds, and securities.

This is one of the better ways people on the verge of retirement can prepare for a recession. This way, you will be able to collect even when the chips are down.

Overall, think about the long term.

Every recession will eventually have an end, and as long as you prepare for a recession the right way, you'll survive it. As hard as it will be, you can expect to see a sunrise on the horizon as long as you have a little bit of foresight.

Keep calm. It's not really that bad.