7 Ways to Prepare Your Portfolio for a Recession
With a global recession on the horizon, there has never been a better time to take a second look at your stock portfolio and ensure that you're set for the months ahead.
The coronavirus pandemic is spreading fear around the world, and while countries are doing everything they can to stop COVID-19 in its tracks with travel bans and lockdowns, the financial markets are taking a hit. By now, it has become obvious that we are headed for another recession and the longer it takes to get control of the virus, the more intense the recession will get.
Therefore, it’s about time that we all do what we can to protect ourselves and our finances as much as we can. Luckily, there are several ways that you can adjust your portfolio to better protect it for the looming recession.
With the help of some financial analysts, we decided to evaluate and list seven of those methods.
Cash is one of the best and safest ways to store funds during a recession. It’s also a great method to ensure that you can buy stocks when the market turns or a great opportunity presents itself such as the plummeting of a usually stable stock that will likely bounce back.
Keep in mind that you don’t want to keep all your funds in cash and that you have to combine it with other traditional investments. You should also not expect to make any profits from your cash holdings.
Commodities and especially gold are known as “safe havens” during global financial struggles. It’s well-known that many stock investors allocate their funds to gold when the stock market falls which, in turn, often results in the price of gold surging.
There are also good ETFs and other commodities that you can place your funds in as long as you analyse them properly. For example, during other recessions, oil has been a good investment but that is not the case this time around.
It’s well-known that many stock investors allocate their funds to gold when the stock market falls which, in turn, often results in the price of gold surging.
3. High-quality Bonds
Historically, high-quality bonds such as the U.S. Treasury bonds have been the best-performing assets during recessions. The reason for this is that bonds, similar to commodities, are considered “safe havens”.
Better yet, bonds tend to provide higher returns for investors than cash and even commodities.
4. Stable Stocks with Dividends
Not all stocks are affected the same way during a recession, and some tend to survive on their own without influence from the regular economic cycle. In fact, if we look back at the latest recessions, we can find stocks that have continued growing.
Furthermore, stable stocks with great dividends act as an additional safety net that gives you as an investor increase liquidity and the ability to continue investing and making a profit.
5. Preferred Stocks
Preferred stocks are a hybrid stock with equal parts equity and debt components which, when placed right, are some of the best types of investments during a financial collapse.
With that said, this can be a risky investment and you have to be very careful. Certain companies can look much better on paper than in real life making them even riskier than regular stock investments.
In addition, preferred stocks as best suited for smaller investments and investors with limited funds.
6. Emerging Markets
Never lose sight of emerging markets and never stop prioritizing growth. Even during a major recession, there are usually certain markets that continue to thrive. In some cases, new markets start emerging because of the recession.
This often requires you looking for international investments and markets that you normally wouldn’t be analysing.
7. Diversification Is the Best Defence
Lastly, keep in mind that diversification is the best protection against a recession. Never keep all your eggs in one basket and try to spread your investments across several markets.
For example, most experts advise us to not place more than 5% of our funds in commodities unless we have a specific strategy, and preferred stocks shouldn’t make up a majority of anyone’s portfolio.
One Last Tip
Another method that should not be overlooked is short trading. By developing a solid strategy for how your best bet against the market, you can continue making great returns even as the market falls.
Now, most regular brokers allow you to short trade certain assets to a predetermined level but often start limiting the options when a recession starts. Therefore, we recommend that you look into short trading assets using online brokers.