You can’t read the financial news these days without coming across talk of a recession. Inflation levels not seen in four-plus decades have persisted as demand far outstrips supply in a number of sectors. The Federal Reserve has all but promised a recession with its schedule of interest rate hikes. Former Treasury Secretary Larry Summers has said unemployment, hovering around record lows, needs to be at 5% for years to rein in inflation. The wisdom of triggering a recession to curb inflation is a different story altogether. But if the recession is to come, your best weapon against it as an investor is to diversify your portfolio.
Go for Value
Unless you’re taking this as your chance to quit your job and finally start that company you’ve always been dreaming of – unlikely with interest rates making borrowing so expensive right now – a recession is not the time to get risky with your finances. More likely, you want to steer into a safe harbor and ride out the storm. This might be a time to invest in value stocks rather than targeting aggressive growth strategies. If you are buying individual company stocks, it’s a good idea to stick with well-established corporations. Such corporations have stood the test of time, previously weathered recessions, and entered this period in good financial health. Rather than picking individual single company stocks, you can diversify your portfolio with a fund that offers a mix so that even if there are a few losers, they don’t sink your entire investment.
Invest in What People Always Need
Some sectors are essentially recession-proof. While people might hang on to their old cars rather than buy during a recession, and they buy fewer luxury items, there are always staples people need. People always need food. They’re always buying beverages, alcoholic and otherwise, whether the economy is going like gangbusters or contracting. There are always things around the house they need and can’t put off. They’ll still use utilities: electric companies, internet services, streaming services, etc. These are the safe bets to diversify your portfolio when other stocks are slipping, especially if people spend more time at home with less disposable income.
Don’t Rule Out Bonds
The Fed has signaled it will continue to raise interest rates through 2023. With an inverse relationship between interest rates and bond prices, bond values are low now. But that could change if stock prices continue to fall in anticipation of a recession. “In both the lead up to a recession and during a recession, government bonds, inflation-linked bonds, investment grade bonds and gold have provided the best protection. It must be noted that ahead of every past crisis, 10-year US Treasury yields were significantly higher than the 2.7% yield offered in January 2019. For example, the 10-year yield was 4.5% ahead of the Global Financial Crisis, 6.4% ahead of the dot-com bubble and 8.3% ahead of the 1990s oil shock,” Partners Capital writes in its Recession Playbook.
Plan for Recovery
Recessions don’t last forever, especially when the economy’s core remains sound. The pandemic halted a great deal of worldwide activity. Businesses shed employees and then scrambled to make new hires when things got going again. Entire supply chains shut down. It was such a monumental shock to the system that ripple effects will continue for years. If you can afford to lose the money, you can try to time the stock market by buying the dips and hope to see stocks climb soon after. Just remember that you’re playing a long game. Diversify your portfolio to weather this storm, set aside what you can to invest when things turn around and strategize for a brighter future. As Omar Aguilar, CEO and CIO at Schwab Asset Management, said at the CNBC Financial Advisor Summit, “Panic is not a strategy. You have to think about the long-term investment objectives and plan strategic allocations and try to look for opportunities to rebalance to those.”