If the ongoing pandemic -- not to mention recent civil unrest and protests -- have you jittery and worried about your finances, fearing a possible prolonged recession, you're not alone. A recent survey of 350 risk professionals by the World Economic Forum found them citing a "prolonged recession of the global economy" as both the greatest concern for the world and the most likely fallout for the world.
Professionals and experts can be wrong, of course, but it's still smart to think about how you might prepare your portfolio for a possible recession. Here are three moves to consider.
Image source: Getty Images.
No. 1: Have some cash
A first concern is your cash. Are you flush with it, or are almost all of your dollars invested? Do you have an emergency fund stocked with at least three to six months' worth of living expenses? If not, you should set up such a fund, pronto. The current environment has many people losing some or all of their income, and costly health setbacks or major car repairs can happen at any time. You might need to sell some holdings to generate cash for this -- keep reading for more on that.
It's also handy to have cash on hand in case the market crashes and sends lots of great stocks to bargain levels. You don't have to liquidate your portfolio in preparation for that -- but a little strategic selling might serve you well. Or simply start accumulating cash instead of spending it on a kitchen makeover or some other expense that can wait. Another strategy is to spend less or take on a side gig to bring in some more money. Remember to park your short-term savings in places where you can earn a little interest, despite our current ultra-low-interest rate environment.
No. 2: Invest in stocks -- resilient ones
When it comes to your stock investing, resist any temptation to simply sell them all and wait out any oncoming recession. That's market timing, and it's likely to thwart your efforts to make money in stocks.
Still, you can adjust your investing style to accommodate the risk of an approaching recession by focusing on a few characteristics of stocks. Specifically, look for:
Defensive stocks
Many stocks can be described as "cyclical" -- meaning that they're tied to companies whose fortunes rise and fall with the economy. When the economy is booming, they do well, and when it pulls back, so do they. Examples would include airlines, cruise companies, and companies that make automobiles, refrigerators, and furniture. At the other end of the spectrum are "defensive" stocks -- tied to companies that tend to hold up well no matter what the economy is doing. In a recession, for example, you'll still pay for electricity and insurance, and you'll keep buying shampoo, food, medications, and other non-negotiable necessities. The companies behind those products and services are defensive.
Dividend-paying stocks
Dividend-paying stocks are also promising investments if you sense a recession ahead -- and, actually, they're great for just about all investors at just about any time. After all, companies that pay dividends tend to be established, with relatively predictable cash flows, enabling management to be confident that the company can pay the dividends regularly for the foreseeable future.
In very hard times, dividends do sometimes get reduced or eliminated, but overall, shareholders will continue to receive income from them no matter how strong or weak the economy is. If you have, say, $300,000 spread across a handful of healthy and growing dividend payers with an average yield of 4%, you can expect about $12,000 annually from that -- which can be reinvested or spent. On top of that, healthy and growing dividend payers tend to increase their payouts over time, helping you stay ahead of inflation.
Strong balance sheets
When a company is referred to as "healthy," it likely has ample cash and cash flow that will keep its operations humming, and at the same time little debt, or very manageable debt with low interest rates. You can assess a company's health in large part by checking out its balance sheet, where cash and debt are reported.
Image source: Getty Images.
No. 3: Consider selling overvalued holdings
Finally, as I mentioned before, you might want to sell some of your holdings in advance of a recession -- not just out of fear, but in order to (a) plump up an emergency fund, (b) keep as gunpowder with which to take advantage of future great investing opportunities, and/or (c) in order to move money into companies in which you have the greatest confidence.
So which stocks are the best candidates for selling? Well, you might consider selling those with weak balance sheets -- companies with relatively little cash and a lot of debt. In times of market turbulence or a recession, many companies will struggle and may need to draw on reserves to survive. If they have none, bankruptcy or simply a plunging stock price may ensue.
Stocks that seem significantly overvalued are also good candidates for selling, as they may be more likely to pull back in price than to keep rising, and you might consider selling non-defensive stocks, as well. Remember, too, that you can always just pare down a position: If you have 500 shares of a stock and you still want to own it, you might sell, say, 100 or 200 shares in order to generate some cash.
Don't panic about a possible or likely recession -- just think about your financial situation rationally and position yourself to be able to live as securely as possible through it.
