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Top 5 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.

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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

Top 5 Tips for Recession-Proofing Your Portfolio

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.

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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.

Related Article: How Should Inflation Affect My Investment Strategy?

5. Develop a Contingency Plan

Top 5 Tips for Recession-Proofing Your Portfolio

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.

Final Word

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.

A financial advisor can also play a hand in helping you build a diversified portfolio that can weather market swings. SmartAsset’s free financial advisor matching tool makes it easier to find an advisor who meets your needs. First you’ll answer a series of questions about your situation and your goals. Then the program will narrow down your options to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Photo credit: ©iStock.com/peshkov, ©iStock.com/Catherine Lane, ©iStock.com/Squaredpixels

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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