Are you convinced the recession is over, or do you think you need to prepare for an economic relapse? What can you do to prepare for it? Well, a bunch of things. One strategy that has received a lot of attention lately is investing in exchange-traded funds (ETFs), which focus on stocks outside the U.S. and on "defensive," or recession-resistant, industries.
There are a variety of ETFs that invest globally. For instance, the iShares MSCI EAFE ETF (EFA) has 65% 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 shareholders haven't completely avoided the effects of the recession. But with more than 2,000 holdings, including Vodafone
One area many people think of as a defensive industry is the consumer-staples sector. Many companies in the sector, such as PepsiCo
Looking for income
Dividend stocks are another place to turn when you have the 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 Chevron
Putting some bonds in your portfolio can add a healthy dose of diversification, too. Some municipal bonds yield more than comparable Treasury bonds do now, 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.
If you're prepared for whatever the markets may bring, you'll enjoy much better results. Although defensive stocks may not do as well if the markets continue to boom, keeping your risk level under control may be the best move you can make right now.
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Dan Caplinger updated this article, originally written by Selena Maranjian and published on Jan. 23, 2008. He doesn't own shares of the companies mentioned in the article. Kimberly-Clark and PepsiCo are Income Investor recommendations. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy pays dividends every day.