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How To Recession-Proof Your Portfolio

In the event of an inverted yield curve or other signs of market turbulence, the key to protecting your investments is a simple 3-part solution. 

You can read part 1 of this 2-part series on What Is An Inverted Yield Curve here.

No portfolio is going to be 100% recession-proof, but it is a good idea to make it as strong as possible to survive any market volatility. Here we have provided a 3-point plan to help any investor shore-up their portfolio and provide themselves with some anchors to weather any economic storm. 

1. Spread out and diversify

Firstly, diversify! A savvy investor should try to keep their portfolio as diversified as possible to offset any market volatility; the same holds for recession-proofing. It is one of the reasons major indexes tend to keep a certain weight per sector depending on the market. The S&P 500 saw its value increase throughout several recessions. The theory here is that one or two of your stocks should continue to bring in some returns on your original investment during market volatility. There are several types of diversification that an investor chooses, a portfolio could be varied across industries, geographic regions, market caps, sectors, or even asset classes — which is often used to provide stability in different economic climates by investing in bonds, etc. 

In addition, try to choose companies that have a certain level of diversification themselves. Much like your portfolio, a diversified company is one that can weather turbulence better. A great example of a hugely diversified company would be Alphabet. As the parent company of Google, it also owns many other firms in various sectors meaning it has a finger in healthcare, in finance and venture capital, as well as tech. Buying stocks similar to Alphabet or even Amazon can add another layer of diversification to your portfolio. 

2. Make defensive moves

Secondly, there are several sectors and stocks that are generally seen as recession-proof, alcohol stocks being one of them. This was particularly highlighted during the Great Lockdown where alcohol sales shot through the roof with an increase of 243% for online alcohol sales throughout March, by May alcohol sales in grocery stores were up 34% year-over-year. 

Health stocks as well as utilities are also considered a safe bet as they are in continuous demand even if they do not have high growth rates. Johnson & Johnson, for example, has weathered 2020 particularly well — even in light of the legal troubles that they have been dealing with. 

Investors should look at stocks that particularly have good money-saving incentives for their customers. Netflix is one in which customers get a great product for continuous entertainment and it is generally considered great value for money. Costco made its mark during the great recession where it provided discounted savings on household goods for its members. Stocks such as these should see you through a recession pretty well. 

3. Hold on and don’t let go

Lastly, now that you have diversified your portfolio and chosen some defensive stocks, the long-term mindset will be your strongest armor. Far too often investors get fixated upon short-term market fluctuations and allow anxiety to influence what becomes a bad investment decision. 

You should see your investments as ownership stakes within the company, you want them to do well, but you have to leave well enough alone to do so. One bad quarter, or even year, does not mean that it won’t pick up the slack down the line. If you believe in the company then you must accept that it is going to experience volatility at some point — whether or not it is during a recession. The market is a cycle after all and by focusing on the long term investors can profit in the eventual rebound after an economic downturn. 

Essentially, you cannot predict how a recession will affect your assets, but the best thing to do to protect your investments in any economic climate is to diversify, keep an eye on essential stocks as well as the high growth ones, and then hold. 

You can read part 1 of this 2-part series on What Is An Inverted Yield Curve here.

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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.

Poppy Murray
Poppy Murray
Poppy is a contributing writer to MyWallSt. Poppy likes companies that go the extra mile. Her favorite stock is Amazon because she is fond of its innovation, variety, and creative solutions to sustainability.