Preparing a portfolio for a recession can be challenging, but a basic understanding of diversification can help you limit your market exposure and maximize returns in difficult economic times. A well-diversified portfolio will spread risk across a wide array of assets to minimize the potential for financial loss while creating more opportunities for profit.
Even in a global recession, some countries are hit particularly hard while other countries with exports more suited to difficult times may actually benefit. One way to use economic disparity to profit is to trade currencies. A more secure method is to spread your risk in international mutual funds. Investors have the option to diversify their own fund by purchasing individual stocks in foreign industries. When developed economies begin to slow, investors can also invest in emerging markets that continue to grow during a recession.
Some industries are known for providing a buffer to shield against greater losses. Examples could include the healthcare and pet care industries, which both may continue to grow due to an increase in demand. It is important to keep in mind, however, that no single industry is completely recession-proof. Individual companies may also benefit from the slump even if their the industry lags behind. For instance, Wal-Mart stock gained 20 percent in 2008 as consumers were forced to change their spending habits. Ross Stores also rose in 2008 by 17.8 percent. Meanwhile, US News and World Report revealed that the average consumer staples mutual fund had dropped more than 25 percent during the same period.
Many experts suggest including treasuries in your portfolio, as they are backed by the U.S. government. Treasury securities are relatively safe investments that can help reduce the risk in your portfolio. Unlike stocks and mutual funds, you are guaranteed your initial investment plus interest. The government uses the lent money from securities to invest in government projects. Securities can include treasury bills, notes, bonds, inflation-protected securities and savings bonds.
Gold and Cash
John Derrick, director of research for U.S. Global Investors, believes that gold can preserve its value better than paper currencies during a recession, calling it "an insurance policy against bad government policies.” During times of uncertainty, investors often invest in hard assets like gold and silver because they are less connected to basic economic activity and are thus less volatile to a portfolio. Although holding paper currencies offers no direct returns, cash can provide a cushion to prevent significant losses. While prices remain low, that cash can be pumped back into traditional investments like stocks and bonds, or be used to purchase other hard assets.
The collapse of the housing bubble has lowered housing values, and as a result investors are using the opportunity to buy investment properties at lower prices. Investors can opt to flip and sell a property or rent out a property as a vacation home or as a long-term lease. Some websites also provide new options for renting to people through the sharing economy, in which people can share their rooms or houses in exchange for money on a daily or weekly basis. Other options include buying and renting a hotel room, leasing a home to a housing association, or extending a short-lease.
- US News and World Report: Is Your Portfolio Ready for a Double-Dip Recession?
- The Telegraph: 10 Ways to Cash in During the Recession
- Dodd Murray: Recession-Proof Your Portfolio: The 10 Golden Rules
- US Department of Labor: Bureau of Labor Statistics: International Unemployment Rates and Employment Indexes, Seasonally Adjusted, 2009-2013
- Forbes: Why One Recession-Proof Industry Just Keeps Growing
- Treasury Direct: Treasury Securities and Programs
- San Francisco Gate: Airbnb, Couchsurfing, Roomorama On the Rise
Nicole Manuel is a finance and economics writer with a degree in economics and more than six years of professional writing experience. She is also a Certified Professional Coach (CPC) known as The Personal Eco-nomist, who specializes in helping people live healthy, abundant lives on a budget.