Are you ready for a prolonged recession, a downturn in the stock market and economy? What can you do to prepare for it? Well, a bunch of things. One strategy that has received a lot of attention lately is investment in exchange-traded funds (ETFs), which focus on stocks outside the U.S. and on "defensive," or recession-resistant, industries.

Global ETFs
There are a variety of ETFs that invest globally. For instance, the Vanguard All World ex-US (VEU) ETF has half of its assets in Europe and another third in Asia. Of course, foreign companies and economies are still affected by what happens in the U.S., so you won't completely avoid the effects of the current recession. But with more than 2,000 holdings, including Nokia (NYSE:NOK), Toyota Motors (NYSE:TM), and BP (NYSE:BP), you'll at least get plenty of diversification.

One area many people think of as a defensive industry is the consumer-staples sector. Many companies in the sector, such as Procter & Gamble (NYSE:PG), Altria (NYSE:MO), and Coca-Cola (NYSE:KO), are often thought to be as close to recession-proof as you can get. Still, don't expect miracles. Inflation and the rising cost of raw materials can put pressure on these companies' profits, too.

Looking for income
Dividend stocks are another place to turn when you have recession on your mind. The iShares Dow Jones Select Dividend Index (DVY) ETF can help you out. It offers bits of about 100 dividend payers, such as Merck (NYSE:MRK), for the price of one. Many of these companies tend to be in defensive industries, such as the aforementioned consumer staples, pharmaceuticals, and utilities, although some are also in the recently beleaguered financial sector. This ETF's yield is almost 7%.

Putting some bonds in your portfolio can add a healthy dose of diversification, too. Some municipal bonds currently yield more than comparable Treasury bonds do, even though they pay tax-free income. But remember that in the long run, stocks have usually trounced bonds, so don't go nutty with them unless you're in or nearing retirement. And be especially careful of esoteric securities like emerging-market debt, because the risks can be extremely high.

Keep in mind
Of course, safety in a recession involves more than just having the right investment mix (and I wouldn't even argue with those who advise not changing your mix at all, but just sticking with your convictions and waiting out the recession). For example, you should also:

  • Have an emergency fund in which you aim to keep between three and six months' worth of living expenses in short-term investments. These can be critical if you suddenly lose your job (hey, it happens, and more often in a recession) or encounter other unexpected big-ticket expenses (an operation or a new roof). Get more guidance in our savings area.
  • Develop a healthy perspective on recessions. Welcome them, because they tend to bring bargains in the stock market. While others panic and sell, review your watch list regularly with a box of tissues nearby to help contain your drooling.

Learn more in these articles:

And if you'd rather just zero in on a few outstanding dividend payers with records of hiking those dividends regularly and significantly, let us help you with that. Take advantage of a free trial of our Motley Fool Income Investor newsletter, which is outperforming the S&P 500. There's no obligation, and you'll be able to access all past issues and read about every recommendation in detail.

Dan Caplinger updated this article, originally written by Selena Maranjian and published on Jan. 23, 2008, and he owns shares of Altria. Nokia and Coca-Cola are Motley Fool Inside Value picks. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy pays dividends every day.