Managing Your Investment Portfolio During a Recession

For a layman the terminology ‘Recession’ signifies business dropping for six consecutive months. However, the exact definition of the term would be that a recession marks a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in the Gross Domestic Product or GDP for two successive quarters. During times of recession, one notices a significant change in the lifestyle of people. Many stop or reduce spending on luxuries such as dining out, new furniture, cars and jewelry. The business houses often announce cuts in capital expenditures such as new machinery, hiring employees or moving to larger facilities.

In order to survive during times of economic stress, there are certain measures that can help in potentially reducing the long term damage to one’s net worth. Firstly, in times like these one should focus on consumer staple stocks. One thing is for sure, no matter how low the finances go but each person finds a way to attain the necessities of life such food, toiletries and certain affordable luxuries like soft drinks and chocolates as well. Secondly, one must look for companies with high sustainable dividend yields. Research has shown that dividends can lower the amount of time it takes to regain losses in an investment. This is due to the fact that reinvested dividends during crashes and market corrections purchase more cheap shares that tend to generate far higher profits once the market rebounds. Thirdly, when recession strikes, liquidity is the key word. At times like these, cash offers a sense of security. Many of the best value investors in the world routinely keep cash on their balance sheet to cater for times when the markets fall.

Fourthly, during recession tax free municipal bonds, Treasury bill, bonds, notes, saving accounts, checking account and money market funds could serve as a good choice for investors. The next important aspect of reducing one’s risk during a recession is lowering fixed payments. Debt can be disastrous if not handled judiciously because it introduces payments that include interest. Not only are the interest costs potentially enormous depending upon one’s credit rating, but they are not tax deductible, making their true cost relative to other forms of debt substantially more expensive. However, fortunately there are resources that may help to pay down one’s debt in order to strengthen the personal balance sheet. Next important thing to do is to maintain one’s asset balance. Investing is all about rationality. For the average person with less knowledge of stocks, lowering volatility can be an important goal. Asset balance can be achieved by diversifying one’s assets, which means moving one’s money into different asset classes such as stocks, bonds, mutual funds, real estate, gold, international firms, fine art etc. The theory is based on the idea that not all markets are correlated; while some may be hit by recession, there could be others that remain untouched or even increase.

There is little doubt that the 21st century belongs to China and India. There is going to be wealth creation outside of the borders of the United States of America. For a recession resistant portfolio, international assets can often provide a pleasant buffer. Also, one needs to always remember that no matter how bad the economy, there is always some pocket of the world where it is incredibly easy to make money because of circumstances that have converged. Recession means that the overall economy is shrinking but one must try to find a hidden ‘bull’ in some part of the world. Lastly, remember not to panic as it is not the end of the world!