Top 6 Tips for Recession-Proofing Your Portfolio

Economic recessions are never pleasant. But they’re an unfortunate reality that investors have to deal with from time to time. While it’s impossible to predict when a recession will hit, there are often clues that warn of a potential economic downturn. If you’re worried that another recession could hurt your portfolio, it might be a good idea to take these tips into consideration.

A financial advisor can help you rebalance your portfolio to protect your investments from a recession.

1. Avoid Potentially Volatile Sectors

When signs of a recession start to appear, you might need to review your asset allocation strategy. Besides assessing how conservative or aggressive your investments are, you may need to take a closer look at the sectors you’re investing in. Certain sectors tend to fare better than others in a recession.

Some experts say that sectors that typically perform the best during recessions are the ones that people rely on daily. Looking at historical trends across various sectors can give you an idea of where you should and shouldn’t invest before a recession.

2. Increase Your Cash Reserves

Investing in cash doesn’t make much sense in terms of returns. But it may be a lifesaver during a recession. If the stock market dives, having cash in a money market account or certificates of deposit (CDs) can help your bottom line. Having extra cash is particularly important if you’re afraid that a recession could leave you unemployed for an extended period of time.

3. Develop Passive Income Streams

During a recession, it can be helpful to have investments that generate passive income on a regular basis. You may want to consider dividend stocks, peer-to-peer loans and passively managed index funds.

If you don’t have time to maintain a rental investment property, you can look into real estate investment trusts (REITs). With a REIT, you can invest in residential and commercial properties without having to do any hands-on work.

4. Protect Yourself From Inflation

Inflation can reduce the size of your earnings. Some experts say you may be able to hedge against inflation by investing in precious metals like gold and silver. Both commodities and Treasury Inflation-Protected Securities (TIPS) can lower the impact of inflation on your portfolio.

5. Develop a Contingency Plan

Making investment decisions based on your emotions can wreak havoc on your portfolio during a recession. Putting some safeguards in place before the market tanks can protect your wealth in the long run.

If you think you might be tempted to sell off investments during a bear market, it’s a good idea to create a plan. That way you can minimize your losses and replace investments without throwing your investment strategy off track.

6. Diversify Across Asset Classes

Diversification is one of the most effective ways to manage risk during a recession. Instead of relying heavily on one type of investment, spread your money across different asset classes, such as stocks, bonds, cash and alternative investments like REITs or commodities. For example, while stocks may decline during a downturn, bonds or treasury inflation-protected securities (TIPS) may provide more stable returns. This mix helps reduce the overall impact of losses in any one area and gives your portfolio more balance through changing economic conditions.

Bottom Line

A woman thinking about a contingency plan during a recession.

A recession doesn’t have to spell doom and gloom for your investments. Reviewing your asset allocation strategy, rebalancing and finding recession-proof investments can make your portfolio less susceptible to major market swings and economic crises.

Tips for Investment Planning

A financial advisor can also play a hand in helping you build a diversified portfolio that can weather market swings. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you want to diversify your portfolio, here’s a roundup of 13 investments to consider.