How to Prepare Your Investment Portfolio for a Potential Recession

• Author: Jacob Greene
• Posted: 2024-09-30

With all signs pointing to an impending recession, you may be wondering how you can protect your investments during this potentially precarious time. An ongoing volatile stock market and rapidly rising inflation rates are triggering the Federal Reserve to continue to ratchet up interest rates, pointing to a strong chance of an economy sliding into a recession in the upcoming months.

Do not be caught off guard with a recession. There are things that you can do to guard your investments against a serious downturn in the economy. Here are a few tips to prepare your investment portfolio for what could be some rocky times ahead.

Do Not Panic and Rebalance

It may be tempting to rebalance your portfolio during times of economic crisis. However, a rebalance is not a good move during a market sell-off. If you sell during a downturn, you are only guaranteeing losses. Try to hold off until things look better before you decide to rebalance your portfolio.

Be sure to understand how you typically react during times of uncertainty. If weathering the storm is generally difficult for you on an emotional level, you may want to rebalance your portfolio toward more conservative investments in the future. Not every investor is cut out to be able to handle times of volatility. If this time period is bringing you stress, going a more conservative route in the future will guard against stress down the road the next time that the market tanks.

Remain in the Market and Lean on Emergency Fund

It is easy to read the news headlines about the economy and want to simply pull out all of your money. However, it is good practice to remember that investors who stay the course and hold on to their investments even during times of recession almost always see a complete recovery in their portfolio. You can leave your money alone if you know that you have an emergency savings account that is separate from your investment portfolio.

A good goal is to have three to six months of living expenses in an account that is accessible. This is unlike retirement accounts that charge penalties for early distributions. Having accessible money on hand will carry you through a potential job loss or salary cut at the hands of the recession.

Funnel Money into the Necessities

This is the time to ensure that you have a good amount of your investments directed into necessities. These are the stocks that will be able to withstand the downturn. For example, utility companies are always considered to be a low-risk investment during a recession because consumers will still need these services. Other investments that are a good idea during a recession include household goods, the food industry, value-driven retail companies, and healthcare. These are all areas in which consumers cannot cut back on even when times are tight.

Specific companies that tend to be recession-proof include Kroger (NYSE:KR), Procter & Gamble (NYSE:PG), General Mills (NYSE:GIS), Waste Management (NYSE:WM), American Water Works (NYSE:AWK), Walmart (NYSE:WMT), Costco (NASDAQ:COST), Dollar Tree (NASDAQ:DLTR), Home Depot (NYSE:HD), UnitedHealth Group (NYSE:UNH), Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE), and Walgreens Boots Alliance (NASDAQ:WBA).

Learn How to Buy at the Dip

Savvy investors understand that there is great opportunity to be had during times of recession. If you are in a solid financial position to take advantage of the market crash, you can find great deals on stocks. Buying at the dip will set you up for success later down the road. The caveat to this is that you should not be sinking more money into a volatile market if you are already feeling a significant financial squeeze because of the downturn. This is when you are better off putting your extra cash toward an emergency fund.

Whether or not the economy slides into a recession is out of your control. However, what is firmly in your control is how you prepare your investments for what may lie ahead. Take these considerations now so that you are ready for the future.