How to Recession Proof Your Portfolio

Pretty much everyone in Canada can agree that a recession is coming in 2024 from expert economists to typical consumers. As an investor, you might not want to see the value of your portfolio decline rapidly during this time of economic uncertainty. The question becomes, how to recession proof your portfolio for the upcoming year? In this article, we’ll explore the characteristics of a recession proof portfolio and what to do to establish that in your own portfolio. Keep reading to learn more!

What does a recession-proof portfolio look like?

The economy goes through many ebbs and flows over time. These booms and busts can be opportunities to build and establish wealth, if you’re smart with your investment strategy. Considering that Canada and other parts of the world are going into a recession, you might wonder how to recession proof your portfolio. Further, what does a recession proof portfolio even look like? 

For starters, nothing is entirely safe from risk. Even the best of investors are exposed to some degree of risk. However, you can definitely employ a strategy to minimize or evade risk to increase your odds of turning a profit, even during economic downturns. Here’s some characteristics of a recession-proof portfolio: 

• Buying investments low. The silver lining of a recession is that many assets and investments fall in value. If you have the cash available, it’s a great time to buy undervalued assets at a low price. Then, sell them for a higher price when the markets recover. 
• No panic selling. It can be scary to see the value of your portfolio fall drastically during a recession. As a result, some investors will panic sell their investments to avoid further losses. However, this isn’t an appropriate strategy. Often, most investments will recoup or supersede their value once the recession passes. So don’t panic sell during uncertain times! 
• Healthy cash balance. During recessions, cash is king. If you are unable to afford your cost of living, then investing doesn’t matter because you will eventually have to liquidate to make ends meet. Ensure you have a healthy cash balance in your portfolio as an emergency fund in case times get tougher. 
• Invest in commodities. When the economy is unstable, the value of commodities goes up while the value of luxuries goes down. Commodities include things like healthcare, transportation, groceries, real estate, and so on. For this reason, it’s good to be invested in commodities because their value can actually increase during a recession, instead of decrease. 
• Diversification. This is one of the oldest investing tricks in the book, but it applies to recession proof portfolios too. During uncertain economic times, no one knows what investments will go up or down. As a result, those who have their investments spread across numerous industries and asset types will expose themselves to less risk. 

Should you rebalance portfolio during recession?

Generally speaking, a recession is not a good time to rebalance your portfolio. Recessions are times of uncertainty which means you may not be able to accurately predict the current state or outlook of your portfolio for rebalancing purposes. Furthermore, the true value of the investments may not be reliable or accurate. In other words, the value of investments can be over- or under-estimated during times of recession. If you make rebalancing decisions based on these values, you may make decisions based on poor market information which wouldn’t benefit you in the long run. 

For instance, an investment may fall quickly in value during a recession, but this isn’t necessarily “real”. Rather, the falling prices may reflect investor panic and uncertainty as a result of poor market conditions, not that the price of the investment is actually declining. If you were to sell the investment to rebalance based on this information, you might lose out on a sharp incline when the market recovers. 

Where is your money safest during a recession?

Keep in mind that recessions are times of economic uncertainty. Meaning? There is no such thing as “100% safe”. Unfortunately, investing always comes with some level of risk. However, these are generally considered the safest places to store your money during a recession, based on historical data:

• Savings accounts. It’s important to have some cash handy during tough economic times. You might need it due to rising inflation or sudden changes in the market affecting your cash flow. Storing money in a savings account allows your cash to grow at a nominal rate while also being readily accessible. You can also consider GICs or TFSAs to store cash reserves during a recession.
• Commodities based investments. Whether it’s a mutual fund, ETF or stock, investing in commodities is always a tried and true strategy during recessions. Commodities are things people need to survive, such as real estate, food, utilities, transportation, or healthcare. Even if the economy is down, people will continue to buy these things out of necessity. 
• Gold or silver. You can purchase investments backed by gold or silver, such as ETFs, mutual funds or stocks in the industry. Alternatively, you can buy physical gold or silver. Whenever the economy becomes unstable, the value of gold and silver tends to rise. Investors can capitalize on this during recessions. 

What is the best asset to hold during a recession?

Overall, most would agree that commodity based investments are the best asset to hold during a recession. These are ETFs, stocks, mutual funds or other securities in essential industries, like real estate, food, healthcare, transportation, and utilities. People require these products and services regardless of the economic state. As a result, investors experience stable or higher returns on these investments, even during periods of recession. 

What are the worst investments during inflation?

In contrast to the above section, industries like travel and retail tend to suffer during economic downturns and periods of high inflation. This is because people no longer possess high disposable income to afford luxuries like vacations or non-essential products and services. Consumers may also experience a reduction in purchasing power if their salary or wages does not increase in line with inflation. All of their available cash goes towards staying afloat financially and purchasing necessary products and services. 

For this reason, avoid investing in non-essential industries during a recession. It’s okay if you hold some of these assets, because the value will bounce back eventually, but make sure to diversify. Further, you might consider buying assets in non-essential industries when they’re low, such as during a recession. This way, you can ride the bull market when it happens. But don’t expect to turn a profit on such investments during a recession, only after!

What not to buy during a recession?

As mentioned above, you shouldn’t invest in non-essential industries during a recession. The only exception is if you have extra cash and are employing a buy low, sell high strategy. But again, don’t expect to turn a profit on these kinds of investments until well after the recession passes – it’s a long game only!

Another asset not to buy during a recession is a house or other substantial purchase, like a business. Often, interest rates are inflated during a recession and consumers require debt to facilitate part or all of the transaction. This means it costs more to borrow money for a mortgage, or other purpose. Central banks usually increase rates to decrease consumer spending which, in turn, cools inflation. For this reason, it’s foolish to take on debt during a recession because you’ll spend more on interest than is normal or beneficial. Wait until inflation and interest rates fall before committing to large, leveraged purchases. Otherwise, these investments will be more similar to debt than assets.

How do I protect my portfolio during a recession?

Ready to learn how to recession proof your portfolio? Check out various tips and tricks below!

Build Up Cash Reserves

Cash is king during times of economic instability. Inflation is often rampant, which means your cost of living could spike unexpectedly and out of your control. In addition, interest rates can rise which could mean higher payments on variable rate debt or new debt. As a result, having a healthy cash reserve is very important to manage unexpected increases in costs. If you don’t have an emergency fund or cash reserve that is readily accessible, consider building one now to prepare.

Invest in Commodities

Commodities are things like real estate, transportation, healthcare, food, and utilities. Regardless of the economic state, people require these products and services to live. Therefore, during recessions, these investments remain stable or increase in value. 

Buy Large-Cap Stocks

Technically speaking, large-cap stocks are defined as corporations with a market capitalization of $10 billion or more. The idea with these investments is that these companies have stable cash flows and operations that will endure a recession. Whereas companies with a smaller market capitalization, or even in the startup phase, might not endure a recession, meaning you might lose your investment in the long run. In summary, invest in large, established companies during times of economic uncertainty to recession-proof your portfolio. 

Gold, Silver and Precious Metals

Historically, the price of gold has risen during economic downturns. The same is often true for silver and other precious metals and commodities. Thus, investing in these assets is wise during a recession. You can either invest in physical metals or buy securities in the industry, like ETFs, mutual funds, or stocks. 

Yourself!

Strangely enough, many people became wealthy during recessions. After all, when times are uncertain, you have nothing to lose so you may as well start a business, pivot your career or take a risk you normally wouldn’t.

For instance, Charles Darrow invented the board game Monopoly after the 1929 stock market crash when he struggled to make ends meet. His friends enjoyed playing it and he needed an income source, so he began selling the game. Eventually, it turned into the game it is today! Other people who established their wealth during recessions includes Michael Burry and Warren Buffet. 

It may feel like recessions are a time for wallowing, but it’s not true! As a matter of fact, it’s actually the best time to take a leap of faith. Ultimately, you have nothing to lose because the entire economy is going through a reset. It’s actually a bigger risk to start a business or make a career change during a bull market because everything is so predictable and stable that you can’t possibly outperform the market. So what does this mean for you? It means now is your chance to invest in yourself and do that thing you always wanted to do. Perhaps it’s starting a business, going back to school, or making a career change. Whatever it is, take the leap of faith now!

Who benefits from a recession?

During a recession, consumers buy less products and services. As a result, businesses perform layoffs to accommodate for the reduced demand. This results in a downward trend in the economy because it also means consumers are earning less money due to layoffs, leading to less spending — and the cycle continues. So who benefits in all of this if it’s not the consumers or the businesses?

Ultimately, recessions are difficult times for everyone. However, those with necessary jobs tend to benefit during a recession. This could be lawyers, accountants, nurses, doctors, or anyone who has employment that is required even during tough economic times. On the other hand, those with less mandatory jobs, like in marketing, travel or retail, might face a layoff and more financial burdens in comparison. Another entity that tends to benefit is the 1%. Usually, there is a massive shift in wealth from the lower and middle class to the upper class. However, this shift is eventually redistributed and a healthy middle class resubmerges once the economy recovers.

Finally, investors who employ recession proof strategies to their portfolio also tend to benefit. Need help with how to recession proof your portfolio? A wealth manager can help. Click here to be matched with one today!

Read More: Inflation and the Market: How do they interact?