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Investing in a could-be recession

By Sheyna Steiner · Bankrate.com
Tuesday, October 4, 2011
Posted: 8 am ET

The R-word is flying around again.

Last week, the Economic Cycle Research Institute, or ECRI, a business cycle forecasting firm, released an announcement stating "U.S. economy tipping into recession."

From their news release:

Why should ECRI’s recession call be heeded? Perhaps because, as The Economist has noted, we’ve correctly called three recessions without any false alarms in-between. In contrast, most of those who’ve accurately predicted a recession or two have also been guilty of crying wolf – in 2010, 2005, 2003, 1998, 1995, or 1987.

A new recession isn’t simply a statistical event. It’s a vicious cycle that, once started, must run its course. Under certain circumstances, a drop in sales, for instance, lowers production, which results in declining employment and income, which in turn weakens sales further, all the while spreading like wildfire from industry to industry, region to region, and indicator to indicator. That’s what a recession is all about.

But not everyone is ready to jump on board the recession bandwagon. Some contend that the economy is growing albeit at a glacial pace.

Regardless, economic growth is made up largely of consumer spending. When the word recession starts being uttered by a succession of credible sources, it gets a little harder to ignore -- and a little easier to put the brakes on spending.

What is the average investor to do? Stick to the plan. Continue contributing to a 401(k), or IRA, or both and continue with your asset allocation plan.

The thing is, it will be most effective and most beneficial if your plan is one that you are going to stick with in good times and bad. If seeing your retirement portfolio drop by 10, 15 or even 20 percent will have you up at night, that may be a signal to dial back on the amount of volatility in your portfolio.

Ideally risk tolerance should be in line with the amount of time the money will be invested. People with 15, 20 or 30 years to invest can load up on more volatile investments whereas people closer to retirement require more investments that focus on protecting principal while offering a decent return -- not exactly easy to come by in this environment.

It's not an easy time to be investing but sticking it out will yield better results than making rash decisions based on fear.

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