15 Ways to Prepare Your Stock Portfolio for a Recession

Recessions and the stock market downturns that often accompany them come and go, but the decisions you make about your portfolio now could have an impact on your finances for many years to come.

Investing during a recession, or preparing your stock portfolio for one, doesn't have to be complicated. In fact, the simpler and more consistent your strategy, the better. Here are 15 ways to prepare your stock portfolio for a recession, whether one is around the corner or years in the future.

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One of the easiest ways to torpedo the health of your stock portfolio is to make a decision based on fear, greed, or panic. These extreme emotions are common among investors during volatile periods, particularly amid those brought about by a recession.

The cold reality is that these emotions will do little to serve you as an investor. If you find yourself combating the urge to make a rash decision about your portfolio, log out of your brokerage account and walk away.

It's better to take a second look at your portfolio at a later time and evaluate your holdings with a clear head than make a decision in the heat of the moment that could have a lasting impact.

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One of the easiest ways to leave your portfolio vulnerable in the event of a recession is to be under-diversified. Why is this? Well, if you're only invested in a handful of companies or sectors, you are more likely to experience the heat of the downturn than if your money is equally allocated across a variety of assets and industries, each with varying degrees of cyclicality.

Strong businesses are still strong businesses, even if their share prices experience pressure in the event of a downturn. Recessions can wreak short-term havoc on the market, and this can cause stocks across a wide variety of industries to plummet, without any changes necessarily occurring in the underlying businesses.

If you're assessing the current state of your portfolio, be sure that any decision to sell a stock is tied to a fundamental business reason rather than the stock's price alone.

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The extreme volatility in the market of late has affected the prices of even the most popular stocks across many different sectors. Often, companies in traditionally high-growth areas like tech have experienced the most significant price swings. If the current balance of your portfolio is not in your comfort zone, taking a close look at the companies you own -- you should be keeping tabs on all your holdings regularly anyway as an investor -- is a great way to ensure that your money is invested where and how want it to be right now.

Investing doesn't have to be complicated. When you invest in 25 to 30 great companies (or more) and hold on to them for many years, your chances of beating the average investor and building a portfolio that stands the test of time skyrocket. In making investment decisions for your portfolio, only put your money into companies that you're truly comfortable holding for a minimum of several years.

If your investing thesis is based on short-term factors, it may be time to reevaluate whether the stock is the right fit for your portfolio or if there are other catalysts at play that make it a worthwhile long-term investment. While it's natural that some investments may carry inherently more risk than others, always make sure that there is a durable underlying business behind each company you buy.

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Presented by Motley Fool Stock Advisor
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One of the most common temptations for investors during a recession is the urge to sell a stock or stocks because shares are down. In fact, some may even face calls to get out of the market altogether and try to get back in at a later date. The trouble with that sentiment is that timing the right moment to get back into the market may result on you missing out on the best windows in the market altogether.

Attempting to withdraw from the market before the "worst" moment strikes and get back in before the "best" moment reappears not only carries with it little chance of success but also is simply not the way to build a robust and profitable portfolio over the long term.

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In assessing the best companies for your investment portfolio, never overlook the importance of financials to a business. Few companies have a perfect balance sheet, but there are always some key signs to watch for when evaluating potential investments to separate the wheat from the chaff.

In addition to metrics like revenue or sales growth, net income, operating margin, and assets and liabilities, to name a few, companies with strong cash flows and cash positions on hand are particularly compelling in a recessionary environment and beyond.

Companies that are burning cash without any clear path to a turnaround should raise red flags for investors, particularly in the event of a looming recession that may increase the cost of doing business for entities across a variety of industries.

A time-tested way to boost investor returns and generate additional investing capital is to diversify your portfolio with dividend-paying stocks. Dividend stocks can be found across a wide range of industries, especially in areas like healthcare, consumer goods, and real estate. When investing in dividend stocks, focus on companies that have a solid track record of not only paying but consistently raising their dividends over a period of years and during a variety of market conditions.

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Enacting a successful investing strategy during a recession doesn't require a special degree or super-secret approach. If you invest your money in all kinds of markets, from bull to bear and everywhere in between, that even-keeled strategy can lend stability -- and growth -- to your portfolio in both up and down markets.

By shutting out the market mayhem and refusing to give into panic or fear, you can continue to focus on the investments that align most with your portfolio and continue moving toward your financial goals.

Just as the urge to sell stocks because prices are trending downward is especially strong, a stock doesn't suddenly become a great buy because it's trading at a discount.

Don't fail to do your due diligence just because a stock appears attractively valued. You should always do ample research before you invest in a stock to ensure that you understand the business and that it's the right fit for your portfolio.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Attractive businesses with a favorable path to growth are often among the myriad of companies trading on sale during a recession. If you have extra cash to put to work in the market in a recessionary environment, it's certainly a great time to do so.

And if you'd prefer to put your money toward more conservative investments during this window in the market, consider options such as blue chip stocks, value stocks (these tend to grow slower, but lead the market during down periods), mutual funds, or exchange-traded funds.

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There's no denying that your portfolio is a great place to put your cash to work, but you shouldn't put all your cash into stocks. Separate from your investment portfolio, you should also ensure that you have a solid emergency fund in place in addition to a certain amount of cash in savings. Should an emergency strike or you simply need cash for one reason or another, you don't want to have to dip into your portfolio for that extra capital.

Many have tried, and all too many have failed, to try to invest based on the what the market may or may not do next. This isn't a viable approach for a long-term investor to follow. When you remove the guesswork and invest in all types of markets, you can ensure you are still invested during the best windows of the market by default.

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The types of companies you like to invest in and the structure of the portfolio you build will be very specific to you. Your age, income, and personal financial goals are just a few of the factors that may impact your personal investing style.

If short-term noise in the market is getting you down, try to focus on the long-term financial goals you've set for yourself and continue to invest in such a way as to set you up to achieve those outcomes.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

It's easy to let audacious headlines or bold commentary deter you on your investing journey. In particular, when fears of a recession are rampant among investors, there seems to be no shortage of purported gurus coming out with the next best strategy to beat the market.

And don't get me wrong, the goal of most investors is to beat the market eventually.

But investing with that singular aim in mind, rather than consistently putting your money into great companies and letting your cash work for you over a period of years, can be a recipe for disaster.

Warren Buffett once said, "I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."

In other words, your conviction about any company or investment you buy should be so high that, even if you were not to realize a favorable return on that investment for a period of years, you would still be willing to own it.

Rather than buying a stock in the hopes of massive short-term returns, you should be investing in companies that are backed up by solid underlying businesses, favorable financials, great leadership, and a road forward to sustainable long-term growth.

No investor is perfect. No investor can predict the future. In utilizing a highly selective but simple approach to investing, you can build a portfolio that weathers the ups and downs of the market and comes out on the other side.

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