Economic recessions are never pleasant. But they’re an unfortunate reality that investors have to deal with from time to time. While it’s impossible to predict when a recession will hit, there are often clues that warn of a potential economic downturn. If you’re worried that another recession could hurt your portfolio, it might be a good idea to take these tips into consideration.
1. Avoid Potentially Volatile Sectors
When signs of a recession start to appear, you might need to review your asset allocation strategy. Besides assessing how conservative or aggressive your investments are, you may need to take a closer look at the sectors you’re investing in. Certain sectors tend to fare better than others in a recession.
Some experts say that sectors that typically perform the best during recessions are the ones that people rely on daily. Looking at historical trends across various sectors can give you an idea of where you should and shouldn’t invest before a recession.
2. Increase Your Cash Reserves
Investing in cash doesn’t make much sense in terms of returns. But it may be a lifesaver during a recession. If the stock market dives, having cash in a money market account or certificates of deposit (CDs) can help your bottom line. Having extra cash is particularly important if you’re afraid that a recession could leave you unemployed for an extended period of time.
3. Develop Passive Income Streams
During a recession, it can be helpful to have investments that generate passive income on a regular basis. You may want to consider dividend stocks, peer-to-peer loans and passively managed index funds.
If you don’t have time to maintain a rental investment property, you can look into real estate investment trusts (REITs). With a REIT, you can invest in residential and commercial properties without having to do any hands-on work.
4. Protect Yourself From Inflation
Inflation can reduce the size of your earnings. Some experts say you may be able to hedge against inflation by investing in precious metals like gold and silver. Both commodities and Treasury Inflation-Protected Securities (TIPS) can lower the impact of inflation on your portfolio.
5. Develop a Contingency Plan
Making investment decisions based on your emotions can wreak havoc on your portfolio during a recession. Putting some safeguards in place before the market tanks can protect your wealth in the long run.
If you think you might be tempted to sell off investments during a bear market, it’s a good idea to create a plan. That way you can minimize your losses and replace investments without throwing your investment strategy off track.
A recession doesn’t have to spell doom and gloom for your investments. Reviewing your asset allocation strategy, rebalancing and finding recession-proof investments can make your portfolio less susceptible to major market swings and economic crises.
Photo credit: ©iStock.com/peshkov, ©iStock.com/Catherine Lane, ©iStock.com/Squaredpixels