These days economic recessions and market volatility have become the new normal. With the stock market facing the wrath of US-China War, protests in Hong Kong and Brexit, Singapore going through its one of the worsts full-year growth in a decade, and the IL&FS downfall in India, investors across the globe, are dreading one of the worst recessions of all times.
While there is no foolproof way to predict when a recession is going to hit, experts can narrow things down by looking at the economic pattern. Hence, it isn’t a bad idea to have a few tips up your sleeve to recession-proof your portfolio.
Avoid Volatile Sectors
Keep an eye for sectors which might have a volatile nature during a recession. Based on these assessments, re-strategies your asset-allocation plan. Thorough research will show you that there are specific sectors which boom when a recession hits. According to some experts, sectors which remain stable during a recession are heavily relied upon by season investors. Taking advice from a seasoned investor and keeping a tab on the historical trends across multiple sectors will assist you in making a calculated decision during the time of recession.
Re-Visit Your Asset Allocation Strategy
Once you have calculated your risk appetite, time horizon, and investment goals, only then go for asset allocation as it can be a tricky task. Doing so will prepare a cushion for your portfolio against market volatility or a sudden recession.
Your asset allocation strategy should be so robust that market swings affecting your portfolio shouldn’t worry you. If you are worrying every time the market experiences volatility, it is high time for you to revise your asset allocation strategy keeping in lines with your risk tolerance and time horizon.
Diversify Your Portfolio
Portfolio diversification is one of the basic steps for recession proofing your investments. Having all your investments in limited stocks can adversely affect portfolio as even the under performance of a single stock can substantially reduce your portfolio value. Hence, ensuring that your investment portfolio is diversified across multiple asset classes like stocks, bonds, commodities, sectors, and geographies is a must.
Maintain An Emergency Fund
During a recession, the best shield for your investments is having an emergency fund. An ideal emergency fund should consist of expenses which can last from three to six months. This especially comes handy during emergencies like medical, educational, or in case of getting laid off. Having a three to a six-months emergency fund is beneficial for young investors, whereas investors who are nearing their retirement should have cash reserves for a decent living for a minimum of two years.
Above anything else. to achieve all the tips mentioned above, you need to remain calm and cool-headed to make any decision. Irrespective of how well you read the trends and patterns to remain ahead of a recession, it can still hit you out of the way. But getting panicked will not lead you anywhere, rather calm yourself and then think of a better strategy to fight against recession.
Recession can take any investor by surprise and can have adverse effects on your portfolio, but it doesn’t necessarily mean it has to be a time of doom for your investments. The above tips will help you sail through a recession and will keep your investments safe. Moreover taking help from financial advisors or trusted seasoned investors will also give you an added advantage to get through these financially tough times.