Preparing Your Portfolio for a Recession

Over the past century, there have been countless recessions that have all served to teach investors the danger of accumulating risk. However, every bull market seems to cause investors to forget the threat of losing their money and to over-leverage their assets in unsafe investments. As economists debate whether a recession has started already or not, there is no question that there is a chance of an economic downturn. Investors must prepare for this reality by restructuring their portfolios to weigh safety over returns.

Dividend Stocks

For investors that have a large exposure to equities, one of the best ways to reduce risk in your portfolio without having to stress about allocating capital to completely different asset classes is by investing in dividend stocks. Dividend stocks are those that pay out a certain amount (yield) on a quarterly or annual basis. These are a great way to turn your equity investments into those that generate a passive income. This is normally a strategy for retirees but can be a great way to hedge your risky investments. Some great dividend investments include Coca-Cola and Apple which are both strong companies that will not collapse anytime soon.

Although dividend investments are a great way to hedge your bets, if the underlying company’s stock price is extremely volatile, these investments are still a detriment. A good way to make sure your dividend stock is safe is by checking the beta. Beta is a measure of risk in the markets. A beta of 1.0 means that the stock is strongly correlated with the market. A beta of under 1.0 means that a stock is less volatile than the market and vice versa. Investing in stocks with a low beta but a high dividend is a great way to recession-proof your equity investments.

Move to Cash

Most investing gurus stand by the rule of thumb that hoarding money under your bed is the worst thing to do with it. However, during a recession having some cash or an emergency fund is one of the best things to do during a recession. During a recession, job security and business stability are futile. It is almost impossible to predict things financially during a recession which is why saving some cash is a great idea.

During a bull market, most of your money should definitely be invested in the markets but you should judge how much should be in your emergency fund by analyzing economic conditions. The best way to make an emergency fund is to start by calculating your entire budget and see where some money can be saved. Instead of investing that money, save it in an online bank account (online banks tend to offer higher rates) where it can be easily withdrawn at a moment's notice.

Investing is hard. Trying to invest during a recession is nearly impossible. That’s why it's best to mitigate risk and be more careful so as to not lose the majority of one’s principle and to mitigate the risk of loss at all.

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