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By Kelly Pedersen, CFP®

How to Recession-Proof a Portfolio: 9 Steps to Take Now

There are those who believe we are in a recession now. Others think it’s not here yet, but it’s on the way. Either way, recessions are inevitable as they are an inherent part of the business cycle. The important thing is to be prepared for what’s likely to come. 

It remains to be seen if the next recession will be particularly painful and deep. Regardless, it’s still a good time now to incorporate recession proofing into the management of your investment portfolio. Below are nine suggestions to do just that:

  1. Keep 3-5 years of easily accessible assets in less-risky investments. Doing so will allow you to draw on those assets as needed to support your lifestyle. Recession proofing a portfolio can mean having six months of potential withdrawals invested in short-term money market funds, which can make a lot of sense, as they are currently earning about 2% returns annualized. Additionally, investing about four years of portfolio withdrawals in longer-term fixed income assets adds another layer of liquidity. Taking this approach reflects CAISSA’s tranches of income strategy, which is an overlay process by which we analyze investment allocations and segment future withdrawal needs into three tranches (or timeframes) that reflect short- and long-term needs and goals.
  2. Strategically rebalance your portfolio. We are in a window of opportunity that could be fleeting when it comes to fixed-income investments. Now is the time to invest in longer-term quality bonds, which have yields as much as 4-5%, that we haven’t seen in more than decade. Maximize your bond allocation while we still have these attractive yields.
  3. Stick to your plan. Revisit your financial plan and the reasons why you chose the goals and risk tolerances you have. Make any adjustments needed to reflect your current situation and then remain disciplined in your planning approach. Stock markets historically have negative returns one out of every four years. Understand that, and working with your advisor, ensure your plan will get you through it. Finally, stress test your financial plan for worst-case scenarios.
  4. Be strategic with your investing, not tactical.  When managing an investment portfolio, buy into asset classes you want to lean into over the next 12 months or longer. Don’t get caught up in the day-to-day volatility of the market or fall for the “latest, hot stock” trap. As a good rule, never invest more than you are prepared to lose.
  5. Be ready to react as interest rate hikes slow. Yes, a rising interest rate environment can hurt bonds and stocks when rates rise too swiftly. However, when rates level off or revert, the stock market typically reacts favorably. Keep your eye on what rates are doing and be prepared to readjust your investment allocation to reflect the opportunity that changing rates present.

  6. Stick to quality bonds and avoid junk. If you are going to invest in fixed income securities, stay away from the “junk bond” companies, as many risk defaulting on their obligations in this market environment. Stick to highly rated, quality bonds with strong balance sheets that are more likely to pay back their debt.
  7. Pay down expensive debt. That typically includes high-interest rate credit cards and home equity lines of credit. Pay them down if you can, as the money you recoup is the equivalent of socking away savings at a similar rate.
  8. Don’t stop saving / investing just because the market scares you. Keep putting money into your 401(k), IRAs and other long-term investments. This market will reset, and you will likely reap the benefits of investing when valuations are depressed.
  9. Don’t be surprised by capital gains distributions this year. Even in an overall negative returns year, investors often still receive capital gains distributions toward the end of the year, which may be larger than you might expect this year. So, be prepared for capital gains distributions, even though some of your investments may be down. Work with your advisor to utilize strategies such as tax-loss harvesting to minimize the tax implications of your capital gains. 

To discuss strategies to recession-proof your portfolio, please contact Kelly Pedersen.