No one really knows which direction the market will go. I saw the stock market drop substantially back in 2008-2009 when I was still in college. Back then, I was part of a student-run investment fund and saw our portfolio lose half its value after a tremendous run in the few years prior. It was definitely a great real-world learning experience and wake up call.
Although it tends to go up in the long run, there are periods of downturn. These periods of downturn have caused significant stress in many of our personal lives and financial turmoil in our wallets. Thankfully, there are ways to decrease the losses that you’ll suffer during a recession, and perhaps even come out on top. Here are some ways to recession-proof your portfolio.
1. High-quality, Dividend Paying Stocks
Look for large, strong, dividend-paying companies that have strong balance sheets, provide inelastic products and can continue to generate earnings in harsh times. These stocks will probably be more stable than the rest of the market. In addition, they’ll continue to maintain or even increase their dividend payment during the recession. The consistent dividends provide you a steady income even if the stock price drops.
Commodities include the natural resources and the inputs that go into manufacturing and production. They include resources such as gold, silver, pork bellies, wheat and others. Look for commodities with strong global demand even in recessionary times.
3. Treasury Bonds
During recessions, investors tend to shift their money away from stocks and toward bonds. Specifically, treasury bonds are a safe haven for investors when markets are tanking. On the other hand, corporate bonds are subject to company defaults and their inability to pay back loans, which results in poor returns for the investor. However, the US Government is almost guaranteed to pay you back.
4. Income Generating Residential Real Estate
During tough times, people still need a place to live. They might have to cut back on eating out, cable TV, luxury items and vacations, but they still need to pay for a place to sleep at night. Therefore, an income generating rental can provide a consistent income source regardless of the market conditions.
5. Recession-Proof Industries
Certain industries are less prone to recessions. The key is to think about how the demand for these products and services will shift when people have less money in their pockets. Utilities, tax services and waste management services are still needed regardless of the economic conditions. Cosmetics, candy and discount retailers tend to do even better during recessionary periods. Cosmetics and candy provide an inexpensive way to feel better about oneself, whereas most people spend more on discount items when their wallets are light. High-end luxury goods tend to perform consistently since their buyers have enough money to not be impacted by a market downturn. Video games also tend to perform well since people would rather spend $60 on a new video game that can last them over 40 hours instead of spending $60 on drinks for one night.
The common theme here for recession proofing your portfolio is to either seek out consistent cash (dividend stocks, rental properties, treasury bonds) or continual demand (recession-proof industries, commodities). These are the types of assets you want to own to bring stability and income to your portfolio during rougher times. Keep in mind that I am not telling you to avoid purchasing other assets during a recession. In fact, you should buy more since prices are dropping. My key message is to make sure to include some of these investments in your portfolio even before a recession hits so that you can generate cash and obtain stability when the economy goes down.
Disclaimer: I am not an investment professional. Please consult your accountant or investment advisor before making significant investment decisions.
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