6 Tips to Help Your Portfolio Survive a Recession

Aug 29, 2019 | Marcia Zhou


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How to protect your portfolio during turbulent times

Recent events have investors concerned about a possible global economic slowdown. The latest reporting of yield curve inversions in both Canada and the United States have rattled markets.

The US economy has avoided recession since the last one ended in 2009. When the economy is booming, worries about a market downturn seem to be unfounded. However, economic slowdowns tend to be cyclical, and although no one can predict the exact timing of a recession, it is not unrealistic to expect another recession at some point in the future.

The equity market turmoil at the tail-end of 2018 is still fresh in investors’ minds, and when the market experiences wild movements, panicked investors tend to rush to dump stocks. It might be time for investors to review how resilient their portfolio would be during a potential recession, and consider which types of investments could potentially safeguard their assets. Below are six strategies to keep in mind to protect your portfolio.

1) Don't Panic

Generally speaking, irrational and emotional decisions during market downturns are major causes of underperformance in investment portfolios. If your investment decisions are driven by the daily noise in the market, it is easy to lose sight of the big picture and forget about your long-term plan. Goal-based investing is especially important in these circumstances. An increased commitment to your life goals will allow you to witness and participate in tangible progress, while reducing impulsive decision-making around market fluctuations. Work with your advisor to project the minimum rate of return needed to reach your financial goals, and integrate your investment process with your retirement planning in order to stay disciplined. When it comes to your portfolio, it is prudent to keep your eye on the big picture.

2) Stay in the Market, Invest in Quality

During a recession, most investors tend to shy away from the equity market. However, during an economic downturn, there often are a handful of high-quality stocks in non-cyclical sectors that continue to do well and provide investors with steady returns. 

When a recession hits, the safest places to invest are high-quality companies that have long business histories, because those companies have been proven to handle prolonged periods of weakness in the market. Those high-quality stocks tend to have some common characteristics, such as a strong balance sheet, along with healthy cash flow, market power, strong dividend growth, and also a strong management team. Investing in dividend growth stocks can be a great way to generate passive income while waiting out the storm

3) Diversify

Diversification is especially important during a recession, as certain companies and industries can be more volatile and their earnings more susceptible to changes in demand. Diversifying across asset classes, such as hard assets like real estate and gold, as well as fixed income, can also minimize portfolio losses.

Real estate assets and REITS can deliver a steady stream of income while you ride out a recession. Precious metals like gold also tend to perform well during market slowdowns. Worries about the risk of large equity market declines stemming from a potential US recession, and various geopolitical events are the key factors in shaping the demand for gold as a portfolio diversifier. The demand for gold often increases during recessions, as it’s considered an inflation and currency hedge.

4) Revisit Fixed Income Allocation

We have witnessed increased volatility in North American markets for the past two years. Investors should revisit their fixed-income allocation to provide ballast in their portfolios.

Some investors may not be interested in fixed-income at the current low yields, but the key benefit of a dynamic fixed-income allocation is the diversification it provides during an equity market downturn. If you hold fixed-income positions in your portfolio, you have seen the value of these holdings as recently as the fourth quarter of 2018. That said, not all fixed income securities are created equal and some may provide more risk than one may expect. Corporate and sovereign bonds, emerging market bonds, preferred shares and bank loans all have different attributes.  Work with your advisor to discuss the specific risks related to fixed income investing like: credit risk, duration risk, inflation risk, reinvestment risk, and liquidity risk.

5) Don’t be afraid to hold cash

You may have heard the phrase “cash is king.” This statement especially holds true during market downturns. However, sudden and unexpected, market corrections often do not last, and bear markets have shorter lifespans than bull markets. Recessions can generate investor anxiety and lead to oversold levels, so working with your advisor to generate a strategic amount of cash on hand will give you the ability to buy favored stocks at attractive and discounted prices. Even within a heightened period of volatility, stocks market tend to provide rallies than may be an opportunity to trim some gains to build your cash reserve.

6) Deleverage and Pay off Debts

As many news sources have reported, Canadians are one of the most indebted consumers. The less money you need to spend on interest payments or servicing debt, the less stressed you will feel during an economic crisis. Working with your advisor to create a debt retirement and deleveraging plan is recommended to provide peace of mind during uncertain times.

The bottom line is that you should be prepared for danger in times of peace. Instead of panicking when you hear that the economy is slipping into a recession, it is always prudent to initiate moves to try to protect your investment portfolio ahead of time. Be proactive instead of reactive, and you just might come out ahead.