TEN Ways to recession proof your portfolio

1. Diversify.
   Different asset classes and different stock markets will perform well or poorly at different times. If your portfolio is exposed to a single asset class – for example, equities – its performance will be closely allied to the fortunes of the equity market, and returns are likely to be volatile. However, if your portfolio contains a diverse range of asset classes, and is spread across different countries and regions of the world, its performance is likely to hold up reasonably well throughout the entire investment cycle.
   
   
2. With this in mind, it is important to look beyond your home market. A UK-focused portfolio might seem a sensible and conservative option for a UK- based investor. However, this strategy leaves you and your portfolios at the mercy of the slowing UK economy and the vagaries of domestic investor sentiment. On this basis, it makes sense to diversify away from your home market and add investments in countries that are well placed to withstand the economic downturn in the west.
   
   
3. Roll with the punches. Your attitude is as important as your portfolio’s structure. Economies cannot keep growing indefinitely, and recessions are likely to happen every few years. Successful investors tend to be pragmatic and realistic, and they invest for the long-term, through good times and through bad.
   
   
4. Look beyond the economic data. Remember that economic data releases are backward looking. At the start of a recession, the figures will still sound surprisingly good, contradicting our own everyday experiences of a slowing economy. Similarly, once economic growth begins to recover, the data will still sound bad for a while. Headlines that scream “worst figures for 30 years” do not necessarily reflect the whole story; however, they are very good at fanning the flames of investor uncertainty, and they sell newspapers!
   
   
5. Cash is not necessarily king. During a recession, it is very tempting to get out of the stockmarket and opt instead for the perceived safety of cash. However, this strategy is very risky; stockmarkets can recover rapidly with little or no warning, so you risk missing out when share prices start to recuperate. Moreover, over time, the real value of your cash is likely to be eroded by inflation. Cash is not necessarily a “risk-free” option!
   
   
6. Go for quality. During recessions and stockmarket downturns, high-quality established companies tend to bear up better than their riskier peers do. A tough environment helps to separate the wheat from the chaff; struggling companies are often forced to cut their dividends and release negative trading statements. Moreover, a falling stockmarket can provide great opportunities to pick up quality stocks at relatively cheap prices. If you already hold quality stocks in your portfolio, you can probably afford to sit tight and ride out the storm.
   
   
7. Look at your exposure to small caps. Historically, smaller companies have been less likely to perform well during a recession. If your portfolio has significant exposure to small caps, it is worth reinvesting a proportion of your assets into some high-quality larger companies with a good history of strong - and rising – dividend payments.
   
   
8. Is your portfolio overexposed to one area of the stockmarket? Different industry sectors tend to perform well at different stages of the investment cycle. During an economic slowdown, share prices in companies that are less sensitive to the economy (for example, relatively “defensive” companies such as food retailers and water and electricity utilities) tend to hold up better than “cyclical” companies that perform well during times of economic prosperity, such as leisure companies and housebuilders. It is always worth holding on to high-quality companies throughout the whole investment cycle, but now is a good time to evaluate your portfolio and ensure that you are not overexposed to high-risk areas.
   
   
9. Think long-term. Recessions do not last forever. If your portfolio meets your own personal investment criteria and is well diversified across a range of asset classes, you can probably afford to sit back and wait for the economy to recover. Sometimes doing nothing is best.
   
   
10. This is a fire drill – not a fire. Stay calm, take the opportunity to reassess your portfolio, and take expert advice. Remember: a fire drill is a good thing: the fire might never actually occur; however, if the worst happens, at least you have taken all the appropriate precautions!