How to manage your portfolio in a recession
The coronavirus pandemic has spread fear worldwide with countries trying to do whatever they can to manage the situation. Meanwhile, financial markets are really taking a hit. It has now become obvious that another recession is in the offing and it’s likely to be more intense depending on how long it will take to control the virus. Fortunately, there are measures that you can take using you Interactive Investor account to shield you from any long-term damage to your portfolio during stressful economic times.
Stash some cash
In stressful economic times, liquidity is important. Cash is the safest ways of storing funds during a recession. It is also a great way to ensure that you can purchase stocks when any chance presents itself such as the dropping of a usually steady stock that is likely to bounce back. During a recession, you’ll need cash so having a lot of it at your disposal will ease any recession downturns such as pay cuts, job loss or a dip in customers.
Reduce your debt
To reduce your risk in times of recession, you should lower your fixed payments like debt payments that you may have. You are likely to survive through a job loss without approaching the verge of disaster if you are well prepared for a recession. Monthly debt payments are likely to set you back on this. Furthermore, someone with less debt has higher borrowing capacity and greater ability to put essentials goods on a credit card during the toughest of economic times.
Diversification is key
Diversification is very important and the best safeguard against the effects of a recession. As an investor, keeping all your eggs in one basket is very dangerous, hence it’s wiser to try to spread your investment portfolio across several sectors. For example, preferred stocks should not make up a majority of your portfolio. You should, therefore, diversify across several asset classes like fixed commodities and income plus equities which can also check against portfolio losses.
Focus on consumer staples
No matter how bad the situation might get, people will always find a way to eat and buy household items like toilet paper. When finances are scarce, consumer staple goods like these and essential services like home energy constantly bring profits for companies that create and sell them. Big corporations like Colgate-Palmolive and Procter & Gamble are not likely to sell less toothpaste, laundry detergent, shaving cream, and dish soap in times of economic downturn unless the situation gets really bad.
Look for emerging and hidden markets
As an investor, you should never lose sight of emerging financial markets. Even in times of a major recession, there will always be some sectors in a certain pocket of the world that continue to thrive. In some instances, new markets start to emerge because of the recession. This may require you to look for international investments that you normally would not be thinking about. After all, a recession just signifies a shrinking economy and not your inability to increase your income!
Consider investing in tangible assets
If it happens that rising inflation may accompany a recession, you might need to consider investing in tangible assets that are less vulnerable to a decline in the procuring power of the pound or any related currency. Investors who have little debt, plenty of cash and great credit, for instance, can consider investing in real estate and property. This strategy could offset the destruction of bonds and alternative fixed-income investments in times of inflation.
When a recession strikes, it is best to concentrate on the long-term prospects by minimising the risk, managing your exposures and setting aside recovery capital for investment. Anticipating a recession is not as hard as you might assume. What’s necessary is having the discipline to overlook the crowd and to shift away from uncertain investments. Furthermore, if you keep a focus on keeping costs low and on maximising your margins, you will definitely come out ahead of the game.