There’s a lot of talk about a recession these days from both
politicians and economists, making many investors very nervous about
the future. Recession is defined as two consecutive quarters of
negative gross domestic product (GDP) growth. Currently, there is no
consensus on whether we are in a recession, going into a recession, or
simply in a bad market, but it never hurts to learn how to protect your
stock portfolio.
Most people sell stocks from their portfolio going into a recession,
but they should be buying. After all, “buy low, sell high” is the
fundamental definition of how to make a profit. Those who have a long
time until they plan on withdrawing money from their portfolio should
look at increasing contributions to their 401(k) and IRA accounts.
Meanwhile, those who are retiring soon should consider staying the
course and riding out the downturn.
The most important thing you can do to protect your portfolio is to
diversify your investments. This means not only buying different stocks within the United States, but also buying ETFs or mutual funds that track indexes in foreign countries. After all, countries like
China and Brazil are soaring while U.S. markets are faltering.
Meanwhile, diversification itself is statistical proven to not only
increase returns but reduce volatility, which means you will realize
more profits from your portfolio!
Recessions also produce many opportunities to profit substantially.
Stock pickers who are able to sort through fundamentals will be able to
find many bargains during a recession. Particularly, companies that
export the majority of their products may be in a great position with a
weak dollar and weak domestic economy. Meanwhile, companies providing
products that people need everyday – such as energy – may also be
companies that are unnecessarily beaten down.
On a related note, it is important to keep a healthy savings account since unemployment tends to rise as economic growth slows. Typically,
it is important to keep three to six months worth of living expenses in
an emergency fund. This money should be kept in a liquid account like a
money-market account that makes more than a standard savings account
but does not carry the risk of an investment account.
In the end, be sure to keep purchasing stock during the downturn and
maintain a diversified portfolio that fits your risk profile. Also be
sure to keep money on the side in case you are affected in other ways
by a recession. Combined, these things can help you recession-proof
your portfolio!