3 Smart Ways to Recession-Proof Your Portfolio

By Tammy Trenta, MBA, CFP, CTC, CEXP, Founder and CEO - Family Financial

“There is nothing to fear but Fear itself,” U.S. President Franklin Delano Roosevelt

I couldn't agree more. Waxing philosophically, fear is an illusion that paralyzes us, and often pushes us towards nonsensical decisions. The presence of fear means that we’ve attached meaning to something out of our control. At its best, fear should be our signal to get things under control - by preparing for whatever is to come.

And preparation is incredibly empowering.

The biggest financial “fear” people are talking about is the eventuality of a recession. You may be worried about it now, or perhaps you’re wondering if you should be worried. After all, the stock market is down, but corporate earnings are strong, and the job market is hot, right?

This is where it gets tricky. We could be in a technical recession already, defined as two negative quarters of economic growth. Our GDP numbers will be released very soon - if they are negative (and they are tracking to be), we’ll know for sure.

This feels tricky because more shoes need to drop to feel like we are in a recession. Ironically, we also have a labor shortage thanks to the Great Resignation. And the imbalance of supply and demand - a lingering result of the pandemic’s supply chain volatility - means prices are still going up. But this is all temporary because we’ve not yet hit the tipping point.

But when is that tipping point coming? As we’ve said, preparedness is empowerment, and a key to squashing fear. So here are 3 things ways you can prepare to keep your finances strong and be in a position to ride out a possible recession:

1. Diversify your investments

My mother called me and said, “All of my friends are selling their stocks! Should I?” God bless her. The answer is a resounding NO. This is absolutely not the time to cash in your chips and take cover. For the most part, everyone’s portfolios are down. But successful people create wealth by taking advantage of times when the marketplace is at its bleakest - and adding to their portfolios. Stocks are on sale right now.

We can’t know if there will be a deeper “discount,” or if we've missed the best part of the sale. But in either case, we can make a very safe assumption the market will recover and hit a new high in the future.

Think of it this way. If you’re shopping for clothing, a 20% discount isn’t much to write home about. And that’s about where we are with stocks. If you’re invested in one company only - this is much riskier and far less predictable than having investments spread over a large group of stocks. One company can go bankrupt. That is pretty scary for inexperienced investors who dabble. But when you are properly diversified, this is not an issue. I don’t expect every S&P 500 company to go bankrupt at once - unless, of course, there is a zombie apocalypse.

Thinking back to 2008’s Great Recession, there were 3 primary types of investors: 

1. Those who panicked when the S&P 500 index dropped 53%. They sold everything, (as my mother suggests above). Those people never recovered what they lost.
2. Those who froze, but stayed the course - changing nothing. Within 16 months, their portfolios went on to hit new highs.
3. Those who took advantage of the “sale” by buying stocks when they were down. Their portfolios went on to hit new highs within only 9 months.

As a family financial advisor, I keep my clients diversified in stocks, bonds, and other assets - both in good and bad times. Time in the market trumps timing the market: it saves you the hardship of having to be right twice: getting out at the perfect time, and getting back in at the perfect time.

If you’re closer to retirement and fear is taking over, let logic be your guide; which is the bigger risk? 

1. Pull out of investments, and risk running out of money during your retirement years?
2. Keep your money in a diversified mix of both stocks and bonds, and other investments - and stay the course. (Hint: Keeping 3 to 5 years of portfolio withdrawals in bonds for living expenses is a great way to avoid selling stocks when the market is down).

2. Review your debt and expenses

If you have the flexibility to do so, now is the ideal time to pay down high-interest debt. Review your budget and categorize your line items into needs, wants, and savings. Re-evaluate ‘wants’ that bring only instant gratification (like your daily Mocha Broka-Chino). Find creative substitutions for expensive activities: Try a staycation website, like Resortpass.com, instead of booking a pricier weekend away. Replace an expensive dinner out with a potluck for your circle.

Living without instant gratification is empowering. You’ll be surprised how much you can appreciate the bigger rewards that come from delayed gratification.

3. Build a cash reserve and increase your investments

If you are a business owner, the rule of thumb is to keep enough cash on hand to cover a year of operating costs. For many, this was the difference between thriving and closure during the pandemic. For individual investors, the rule of thumb is to keep 3-6 months of cash available. Granted, companies haven’t had many significant layoffs - but if this comes to pass, 3-6 months of savings will give you the breathing room to find a gig that is right for you - instead of a job you need immediately to put food on the table. Of course, if you have the resources, recessions are a great time to increase your investment savings, otherwise, simply stay the course if you can.

The bottom line? Be proactive, creative, and prepared. Zombies don’t exist, so you’re probably going to live through this. But wouldn’t it be a lot more fun to thrive than just survive?

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.