How to Protect Your Investments During Economic Recessions

Although recessions may not always be preventable, there are several things that you can do to protect your investments when the economy is not doing well. To protect your investments, financial advisors recommend keeping yourself informed about the economy, diversifying your portfolio and making decisions of allocation based on your specific risk tolerance and financial goals.

Another way to reduce recession risk is to avoid more speculative stocks in favour of so-called ‘defensive’ sectors – healthcare, utilities and consumer goods.

Dividend-Growth Stocks

Although recession is an important concept in economics, it cannot be avoided in a given business cycle.It can be taken as one of the most difficult times for the investors who are involved in business.Technically, in order for the investors to remain protected, they can save themselves from these economic turnovers by incorporating various diversifications and also adding assets which are considered to be known as hedge assets.

Recessions allow investors to acquire lower-priced shares of high-quality companies and offer investors a solid way to make money in a recession. One way to do this is to avoid investments that move with the economy, which might cause these investments to fall further in a recession.

Instead, choose stocks in areas such as health care, utilities and consumer staples whose products and services consumers need no matter how raucous the economic tea leaves. Build a diversified portfolio, and put aside at least six months of expenses in an emergency fund. If you take these measures, your investments could endure any coming economic storm – and even profit from its upside.

Non-Cyclical Sector Stocks

Panicking amid a recession will make you more likely to make a bad investment; this moment, which can last for months, makes for good buying. Get your money into stocks – but find non-cyclical stocks: utilities, consumer staples and bargain retailing. Cyclical stocks such as real estate and consumer discretionary goods are less likely to track the economic cycle, and you want to pick stocks that do.

Non-cyclical stocks represent industries that are immune to economic cycles, covering such areas as utilities (such as water and gas utilities) and healthcare services. All we need in life is to keep the water running and have a doctor on standby. Household products such as detergent are also included as we still need to clean ourselves. Of the three types of stocks, non-cyclical stocks perform best in bear markets, given that their forward sales and profits are less susceptible to recessions than cyclically oriented or luxury goods, which are subject to reduced consumption.

It would still take its toll on even non-cyclical sectors of the economy. Households, for example, could start limiting their spending on luxury items and discretionary spending more widely. Their reduced spending power would affect most companies that rely heavily on servicing households’ demand, such as furniture, car, fashion, jewellery and other retailers. If companies are able to issue stocks to raise capital (just as they did in this downturn) rather than rely on more expensive and hard-to-obtain bank loans, such forms of debt financing lead to reduced profitability. Even companies that do not rely on solvent households as their main consumers, such as social media companies, streaming services, and so on, have come under pressure.

Short-Term Investments

Recessions are scary, but the best way to protect yourself against one is to follow your plan. Timing in and out of markets might expunge some losses forever, but it also risks locking in those losses, as well as foregoing potentially greater gains as the economy recovers.

In economic downcycles, seek fixed income (bonds) and dividend payers that will be a source of regular cash flow while you weather the storm. Defensive names – think utilities, consumer staples stocks – can also offer some refuge from economic cycles, as their revenue tends to be less sensitive.

And keeping an emergency fund and staying with your percentage or dollar‑cost‑averaging during recessions also helps you stay the course. Recessions come and go whether you look or not; what you can control is preparing yourself: stay invested, keep your emergency account funded at all times, and don’t sell your investments because of short-term volatility.

Long-Term Investments

Develop good cash reserves to deal with the blow and continue to scale for your long-term goals. Diversify into blue-chip stocks with consistent dividends, or aim for industries such as health care or consumer staples that tend to perform better during recessions.

By buying investments while they are on sale – taking advantage of the recession discount – and staying the course and looking for opportunities during downturns, you can bank huge long-term returns.

While recessions may be inevitable, you can still make sure you’re prepared. And being prepared can dramatically boost your growth potential and secure your future over the long term. If you have an emergency fund, consider investing yours in the five major cardinal categories. If you don’t have an emergency fund, put it into a savings account to start building one, and then invest the rest in the five categories. Avoid any high-risk investments in favour of investment options that offer some level of downside protection. If certain accounts in your portfolio are performing badly, see a financial adviser. You should also work on diversification across asset classes. Stick with the five major cardinal categories and consider working with a financial adviser. Alternatively, if you happen to be wealthy (read: your assets are worth more than $10 million, not that you’re a dick), you can create a private wealth office, which acts as an in-house adviser.

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