As the new year gets into full swing, the possibility of an upcoming recession still looms large and may feel like a big gray cloud hanging over your finances. But it’s not all doom and gloom. There can be ways to protect your portfolio and investments to weather the storm by using some subtle recession-proofing diversification tactics.
You’ve probably heard plenty of people go on and on about diversifying, and for good reason! When the economy and markets are as unpredictable as they are right now, your best bet for staying on top is to diversify wisely. But how should you diversify during a recession?
How a Recession Impacts the Stock Market and Investments
Typically, a recession leads to quieter returns across the board for most stocks and investment asset classes.
Some businesses and securities will still do great. Yet, who comes out on top is never a guarantee. Also, the high inflation and rising interest rates you’re seeing right now will play a role that’s yet to be fully determined and accounted for.
During a recession, investors tend to look for more “secure” options, which sometimes means bonds or Treasury bills. Or dividend-paying stocks that pay out a level of regular income.
This way, if there is little or no growth, investments can still generate a return that you can reinvest or spend. But remember, you don’t have to follow the pack. You can diversify and invest in other ways that suit your outlook and wealth-building goals.
Five Diversification Methods to Use in a Recession
Here are five strategies you can take on board to help with your portfolio if we stumble into a recession.
1. Keep Extra Cash.
Even against a backdrop of high inflation, if you find yourself in the belly of a recession, it’s well worth having some dry powder (cash) on hand.
Over the last hundred years, U.S. recessions have had an average length of just under 13 months. This doesn’t mean you should expect the next recession to last this exact length of time, but it’s a useful guide. Keeping a healthy level of cash throughout a recessionary period can be worthwhile, even if it loses value in the short term.
So, if we end up in a recession, it’s a good idea to keep more cash than you usually would to help ride out the downturn. Diversifying with extra dollars in your back pocket means less chance you’d need to sell investments at a potential loss.
Extra funds at your disposal will also allow you to jump on any great investment opportunities that crop up while everyone else is distracted and miserable.
2. Use Commodities.
If you don’t keep an allocation of commodities in your portfolio, now might be a good time to consider doing so.
During a recession, the world keeps spinning, and many commodities will still be in high demand. Historically, numerous commodities have performed poorly, but using them as a diversification tool can be a great long-term move. And it’s often best to invest before we hit a full-blown recession and prices rise (because everyone else has the same idea!).
If you’re new to commodity investing, you might consider using ETFs (exchange-traded funds) or managed funds to make things easier for you.
It’s also worth using a mixture of commodities, because you don’t want to be overexposed to a single market. Precious metals like gold can be useful, but be mindful to find a good entry price point, because plenty of investors flock to assets like gold during a recession — which can bump up prices.
3. Think Outside the Box.
A recession is an excellent opportunity to get creative with your investment portfolio.
Most of the time, you’ll want to focus on protecting your wealth rather than looking for big gains when growth is slow, because those high returns become increasingly challenging to find!
Yet, there can still be opportunities out there. Picking the investment options that will be successful is the hard part. But, if you use this time to diversify and look into investment opportunities that other people are overlooking, it can boost your chances of making long-term gains.
It’s worth diving deeper into assets such as:
- Art and antiques
- Classic cars
- Whiskey and wine
- Music royalties
- Real estate (perhaps using a REIT)
The list goes on. Searching outside the obvious means you might find some hidden gems. You may even pick up a new hobby related to an alternative investment category that keeps you occupied throughout an economic slowdown.
4. Look for Recession-Proof Stocks.
Some people make this sound easy. The truth is, it can be pretty difficult. But it’s not impossible.
Life carries on during a recession, and plenty of businesses will still make money. Finding the stocks that will perform best can be tricky. Your best bet is to look at what’s worked in the past, then adapt these picks to your investment strategy and the current economic climate.
Each recession is different. So don’t expect things to go exactly the same as in other years. However, you can still learn lessons. Some previously recession-resistant industries and sectors include the likes of:
- Consumer staples
- Health care
- Energy and utilities
- Discount retailers
Remember that no one has a crystal ball to predict the future. Spreading your bets across areas that have performed well previously is definitely a good place to start.
5. Make the Most of Your Accounts.
This way of diversifying is a bonus. It’s important to use your full range of investing options during a recession, but it’s also vital that you make the most of all the accounts at your disposal.
This means making the most of any tax-advantaged investing and retirement accounts that are tax-deferred or tax-exempt, including:
- Tax-exempt: Roth IRAs and Roth 401(k) plans.
- Tax-deferred: Traditional IRAs and 401(k) plans.
During a recession, it’s worth grabbing any low-hanging fruit that you can. Before you dive into any complex methods of diversification, be sure to take care of the basics and your foundations.
Along with maxing out any easy wins with tax advantages, it’s also worth reviewing your current brokerage or investment platform. Make sure that the costs are reasonable and that you have decent access to a variety of investing options.
Of course, it’s helpful to know how to diversify during a recession, but keep in mind — it’s wasted energy if your stock brokerage doesn't let you invest in a wide selection of assets, or they charge you high fees for doing so!
Justin’s work has appeared in major publications including Entrepreneur, Finance Magnates and Money Show. Justin has expertise in trading, personal finance and digital marketing. He holds a Commerce degree with honours and Master's in Marketing from Monash University. Justin is the CEO of the digital agency Innovate Online, which he founded 11 years ago. The agency provides direct marketing solutions to some of the largest globally listed companies, and he also assists with small-business start-ups. Previously, he worked for one of the largest advertising agencies with listed financial institutions as clients from ANZ bank to NIB health insurance. He also worked in the UK as marketing manager for a health and safety firm and before that at Federal Highway Administration (VicRoads) in the finance division. He also co-founded the finance website Compare Forex Brokers, which publishes reviews about brokerages to help traders reduce trading fees. Within the US, the site focuses on helping traders select a CFTC-regulated broker based on spreads and trading software features.
How To Use Sector Rotation In Investing
Anticipating turns in the economy through sector rotation can pay off for nimble investors.
By Nellie S. Huang Published
A Disability Doesn’t Have to Force an Early Retirement
A feature on what people who experience disabilities later in life can do about work.
By Alina Tugend Published
Four Reasons to Rent When You Downsize for Retirement
Renting is great when you want to test-drive a location, or you want more predictable costs. It might be easier for family relationships in the long run, too.
By Evan T. Beach, CFP®, AWMA® Published
Give Your Charitable Giving a Boost With These Strategies
Donating to charity is easy. Getting the most from your donation and paying less in taxes can be more complicated.
By Jared Elson, Investment Adviser Published
A Plateful of Financial Topics That Might Come up Over Turkey Dinner
From higher prices and mortgage rates to AI planning our retirements: These are some of the conversations you might have as multiple generations gather for the holiday.
By Jerry Golden, Investment Adviser Representative Published
Four Holiday Shopping Strategies to Keep You in Check
Overspending during the holidays is so easy, but if you go into the shopping season with a plan and a budget, you’ll be so much happier in 2024.
By Tony Drake, CFP®, Investment Advisor Representative Published
Four Tips for Discussing Your Estate Plans at the Holidays
Family gatherings are the perfect time to talk with family members about representing you in your estate plan and to let them know what the expectations would be.
By Allison L. Lee, Esq. Published
What to Do if Your Employer Stops Its 401(k) Match
If other companies follow in IBM’s footsteps, employees will need to make some adjustments in their retirement savings.
By Mike Palmer, CFP Published
How Do Non-Compete Clauses Work? Are They on the Way Out?
Even low-skilled workers are subjected to non-compete clauses, but that could change as lawmakers take them on for restricting mobility and keeping wages low.
By H. Dennis Beaver, Esq. Published
What Is the F Reorganization, and Why Is It So Popular?
This year has seen an uptick in F reorganizations. Let’s explore the advantages and disadvantages for buyers and sellers.
By John M. Goralka Published