A recession refers to a considerable decrease in economic activity that lasts for several months or even years. As per Kavan Choksi / カヴァン・ チョクシ, recession is generally marked by declining retail sales, increasing levels of unemployment, lower gross domestic product (GDP), as well as contracting measures of income for an extended period of time. Recession is an inevitable component of the economic cycle, and hence, investors must be proactive about building a recession-proof portfolio.
Kavan Choksi / カヴァン・ チョクシ highlights a few best practices for building a recession-proof portfolio
Economic downturns take place due to diverse reasons, starting from geopolitical tensions to financial crises. While recessions can be tough for investors, following the right strategies can help protect investments, even during market declines. Creating a recession-proof investment portfolio involves choosing assets that can handle market volatility and deliver consistent returns.
The prime elements of recession-proof investing are:
- Defensive Investing: Choose stable assets and companies that provide consistent income.
- Risk management: Steer clear of high-risk investments to prevent substantial losses.
- Asset diversification: Diversify investments by spreading them across varied sectors and types of assets.
Diversification involves spreading investments across varied asset classes with the goal of mitigating risks. It allows investors to reduce the impact of any single investment’s poor performance on their overall portfolio. A diversified portfolio features a good mix of stocks, bonds, real estate, and cash equivalents. Each of these assets performs differently in various conditions. Geographic diversification and sector diversification are also important. One should invest in global markets to reduce exposure to domestic downturns, and include stocks from defensive sectors like healthcare and utilities into their portfolio.
Defensive stocks are non-cyclical stocks from companies that provide essential services and goods, and are relatively stable during recessions. These stocks have lower price volatility than cyclical stocks. When planning to invest in defensive stocks, one must pick well-established companies that have strong financial and a reliable dividend history.
Allocating funds to fixed-income investments can also help build a recession-proof portfolio, as bonds provide stability and income during stock market declines. One should especially consider investing in:
- Government Bonds
- Corporate bonds from financially stable firms
- TIPS, which are inflation-protected bonds that help preserve purchasing power
As per Kavan Choksi / カヴァン・ チョクシ, one should balance their bond allocation with risk and income needs, and consider bond ETFs for easier diversification.
To deal with market uncertainties, one must also rebalance their investment portfolio regularly. Over time, some assets may outperform or underperform, causing the risk profile of a portfolio to shift. In order to stay aligned with one’s financial goals. It would be a good idea to rebalance on a quarterly or semi-annual basis. Investors should also explore alternative investments like real estate, commodities, or private equity to strengthen their financial position. These assets often behave differently from traditional stocks and bonds, offering valuable diversification. They can also serve as effective hedges against inflation, especially during periods of economic volatility.
