High inflation, increasing interest rates, ongoing supply chain issues and an inverted yield curve, all of it does point to the possibility of a recession. Kavan Choksi Professional Investor says that while this might be a concern for many, it is also vital to remember that the economy is constantly fluctuating. A slight downturn might not necessarily predict a full-blown recession. An impending recession, however, would be a good time to reevaluate one’s investments and try to build a recession-proof portfolio.
Kavan Choksi Professional Investor talks about how to recession proof an investment portfolio
As financial outlooks and profit margins inevitably get weaker, the markets tend to falter, leading to depleted investment potential and deflated portfolios. However, not every investment suffers the same during a recession. Even though no investment is essentially 100% recession proof as there is never a guarantee of gains, certain investment instruments are not likely to suffer as severely as others when the economy sours. Moreover, a few investments that struggle early on may ride the upside when the economy recovers. Hence, to weather risks associated with recession, it is better to invest in:
- Dividend-paying stocks: Investing in quality dividend paying stocks would allow the investors to enjoy an extra passive income in both good and bad times. However, as the recession hits, one must particularly keep an eye out for companies that have paid dividends consistently for decades. These companies would have higher odds of continue paying out during a recession. They also may experience smaller or fewer price fluctuations in comparison to growth stocks.
- Consumer essentials and defensive stocks: Such stocks can further insulate an investment portfolio during economic downturns. It is a good idea to invest in equities in industries that consumers rely on directly or indirectly regardless of economic headwinds. These industries like include consumer staples like groceries and household goods, healthcare, and even shipping and transportation. Even though these industries may not experience massive growth spurts, their importance among the customers makes them a great hedge during downturns.
- Stock funds and ETFs: People wanting to diversify their portfolio should consider investing in stock funds like ETFs and mutual funds. Such assets provide instant diversification, and are likely to experience comparatively less volatility than more concentrated portfolios during uncertain markets. Moreover, people investing in stock funds and ETFs, do not have to spend much time in managing their portfolio when things get rough. Choosing to invest in index funds can especially be a good idea, as they a popular kind of stock fund in all economic climates.
- Bonds:Â As they are a relatively safe investment instruments, investors may even choose to buy bonds during periods of economic instability. Bonds may provide guaranteed interest payments on a regular schedule till the time of maturity, which can be of a huge help during a downturn. It particularly would be a good idea to invest in government bonds, which are backed by the U.S. government rather than corporations.
As Kavan Choksi Professional Investor says, fluctuations in the stock market are inevitable. However, by smartly choosing the investment instruments and ensuring adequate diversification, one can recession proof their investment portfolio.
