How you can manage your IRA in a recession

When recessions seem near, it can be stressful, especially for those nearing retirement. So, what can you do to manage your IRA through difficult times? Here's a breakdown for you:

Fiscal hygiene for your IRA

To quote Douglas Adams, “Don’t panic.” Life is full of changes, and not all of those changes are pleasant. But if you keep making decisions based on reason and don’t start making decisions based on fear or greed, you can likely come out ahead.

The basic rules of fiscal hygiene for your IRA still apply:

Just like the hygiene you should perform daily, monthly and yearly to keep yourself in good health – brushing your teeth, going to scheduled checkups and having annual exams – consider continuing to contribute to your retirement savings, talking to a financial advisor and doing a yearly check to make sure your investments aren’t too heavily weighted in one area.

Keep making regular contributions

You may be able to contribute up to $7,000 to your traditional or Roth IRA (or any combination of the two) for 2025. People who are age 50 and over may be able to contribute an additional $1,000 ($8,000 total). That is in addition to any workplace retirement plans you may have.

Some people prefer to put their annual contribution into an IRA as soon as possible, and some people wait until the yearly deadline, which is the day your tax payment is due (usually April 15). Still others prefer to put in a fixed amount each month in a process called “dollar cost averaging.” No one method is inherently better than another, though you may have a personal preference. Lump sum investing can take advantage of uneven income; dollar cost averaging gets you in the habit of putting money away for retirement regardless of market conditions and reduces the impact of trying to time the market.

Diversification is key

Diversification is just a fancy way of saying that you’re better off in the long run investing in a lot of different things rather than putting all your eggs in one basket. If you’re buying individual stocks in your IRA, you’re generally better off buying a number of stocks in different sectors, of different size and in different geographies, than you are buying one or two stocks of companies that do the same thing.

A diversified portfolio of stocks and bonds can generally give you a smoother ride, with fewer and smaller ups and downs than being invested in just one thing. And the smoother your ride, the less likely you are to react emotionally when there’s a big move in the markets – or in your investments. If you are making the decision yourself as to what kinds of securities you have in your account, it’s important to understand the relative risks and rewards of different investments over different time horizons.

For example, you could have bought a single growth stock with significant upside potential, like stocks that benefited from the pandemic lockdowns of 2020 and 2021. If you had your entire IRA invested in a company that provided at-home entertainment or video conferencing, you would have seen your nest egg multiply its value for two years. (And of course very few people saw the pandemic coming, and even when it became obvious that it was going to hit the U.S., most people in early 2020 were focused on buying toilet paper rather than exercise bikes and video conferencing subscriptions.) But if you didn’t sell at the right time, you would also have seen that nest egg shrink significantly in 2022 – potentially below the level where you bought it.

If on the other hand you had a diversified portfolio of growth and value stocks, along with bonds, your portfolio would not have experienced the highs of 2020 and 2021 – but it also would have performed much better in 2022 than those individual investments. That relatively smoother ride made it easier to stay invested even through rough markets.

Economists talk about risk appetite – how much you are willing to risk losing for a certain level of return. But it’s better to think of risk as something you can tolerate (and many planners will ask you about your risk tolerance). In financial markets, risk equals uncertainty, not just loss. Risk – the uncertainty about what a stock’s price will be tomorrow – can work in your favor if you happen to buy a stock that goes up, like the pandemic stocks we talked about earlier. But that uncertainty was thrown into stark relief when those stocks came crashing back down. If you can’t tolerate losing a penny of your account value after it reaches the number you need for retirement, that needs to be a part of your retirement calculus.

But the flip-side of an investment that has no investment or price risk – such as cash or short-term government bonds – is that it also has very little possibility of outsized returns. Diversification moderates risk in both directions – the lows should be higher, the highs lower, and that moderate journey should give you slow and steady growth over time. Put another way, hitting singles and doubles and not striking out may be more likely to give you a higher score at the end of the game than swinging for the fences and striking out most of the time.

Thinking about your goals for your retirement account and the different types of assets that you could invest in can help you determine what your overall asset allocation should be – and how you might change it over time. Is now the right time to move into bonds? Only the future will know, but it appears to be more opportune time to own bonds than a year ago.

Seek out professional advice

It’s often very difficult to envision a result that may not come to pass for 20 or 30 years, and it’s very easy to lose sight of your retirement goals if you look at your IRA balances and stock prices every day. Working with a J.P. Morgan advisor can be one way to have someone help you gauge your risk tolerance and understand the trade-offs in different investment strategies. A J.P. Morgan advisor may also help you avoid emotional decisions by reminding you to focus on your long-term goals rather than the day-to-day movement in markets.

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