Recession Proof Your Portfolio

            The "Big Dipper" at the Beach Boardwalk, Santa Cruz

            The "Big Dipper" at the Beach Boardwalk, Santa Cruz

Recession proofing your retirement assets and investment accounts is an activity that is typically overlooked until it’s too late.  When the economy is doing well and financial assets and real estate are appreciating in value is exactly the time to consider the impact of a less favorable environment.  Unfortunately, most investors only become concerned about their portfolios after values begin to deteriorate when economists start talking about the "R" word or Recession.  Will your retirement portfolio hold up to a short (or even worse) long term recession?  How about a severe personal dislocation like job loss or business failure?
The best advice: know how to diversify your retirement investments to avoid key areas where recessions hurt most.  When market risks are unexpected and uncontrollable, diversification is the only solution.  Here are six ways to recession proof your retirement investments.

Stay Liquid

Cash is typically viewed negatively by both investors and advisors…but should it be held in such contempt?  The traditional argument against cash is that it is low yielding and has no growth potential.  But does it serve any other purpose in your financial plan and investment portfolio…absolutely!  First, having a solid cash reserve cushions your current income and spending from the day-to-day volatility of the financial markets.  Second, while cash does impair your total return in a positive market, it minimizes the losses on the downside.  Finally, to take advantage of low prices often available for equities during recessions.  (Note: renowned investors Warren Buffett, Martin Whitman, Mason Hawkins, Robert Rodriguez, Bruce Berkowitz and others maintain sizable cash balances across their portfolios.)       

Own Quality

Industry leaders with low leverage (“debt”) hold up much better than smaller or financially weak competitors.  Unlike higher quality companies, they will have difficulty  finding financing and will struggle to maintain their businesses.  The industries that are the most negatively impacted during a recession:

  • Real estate
  • Luxury Items
  • Investment Banking
  • Industrial Materials
  • Commodities
  • Other discretionary consumer goods

In other words, look towards industries and companies that can deliver more predictable growth. These companies are often larger and they have a significant amount of cash flow to keep them paying dividends.  In fact, difficult economic environments are huge opportunities for these companies as their weaker competitors struggle or fail.

Don't be Afraid to Get Paid

There are only two ways to profit from an investment; income or appreciation.  Holdings can generate interest, dividends or rent (in the case of real estate)…and they may appreciate over time (with no guarantees).  The income produced provides reliable income for retirees and a source of funds to reinvest for investors still accumulating assets.  

You want to own dividend-paying stocks in your portfolio and to concentrate on companies that tend to increase dividends year after year.  Over a single year, equities are so volatile that most of an investor's performance is attributable to share price appreciation or depreciation.  Dividend income adds only a modest amount to each year's gain or loss.  While year-to-year performance is driven by capital gains, long-term returns are heavily influenced by reinvested dividends.  

Know the Basics

While Americans are pinching their belts because of the fear of recession, and holding back on their overall spending, there are still areas where they will spend.  People need everyday items even when times are tough.  Investing your portfolio into businesses that are not economically sensitive is a prudent strategy.  What are these must haves?  It includes a variety of consumer staples such as:

  • Utilities;
  • Personal Care;
  • Healthcare;
  • Food manufacturers;
  • Household Products, and;
  • Alcoholic Beverages and Tobacco.


Cast a Wide Net

Should you invest beyond your home country?  The traditional argument is that it reduces risk through diversification.  Yet, this has not always been the case in practice, especially during downturns which tend to impact economic growth and valuations globally.  Rather than deliberately spreading your assets across countries (or even worse, deciding in a mechanical way to have %___ of your portfolio outside your home country)…merely allocate your capital and assets to the best available holdings at any given time.  

In recent years, Warren Buffett has invested in China by acquiring shares in PetroChina and purchased 80% of Iscar Metalworking (a private company based in Israel).  The genesis of these decisions certainly did not emanate from a deliberate strategy to invest in those specific countries or outside the United States generally.  Rather, the opportunity to acquire high quality assets at a discount to Mr. Buffett’s assessment of intrinsic value arose.  You should consider expanding your investment universe to securities located not just in the United States but other stable countries in Europe, Japan, Canada, Australia or the U.K.  In addition to uncovering additional opportunities, a secondary benefit would be the ability to earn investment income from a diversified pool of currencies.

Think Look Long Term

Remember that retirement assets and investments are for the future.  Since all markets are cyclical, there will be difficulties along the way.  Extend your time horizon…be less concerned with the earnings today but keenly focused on the earnings ten years from now.  Once you have implemented steps 1-5, let the short term investors make the mistake of reacting to their fear.  Your job is to focus on the opportunity to build your assets with high quality assets, which pay dividends, in understandable industries and companies, regardless of their country of origin.     

Recession proofing investments for retirement does mean taking a closer look at your current portfolio and investment approach.  Where are you investing?  What are your financial goals?  How can you still meet those goals with your current portfolio?  In addition, how can you protect your portfolio for the long term?  Recession proofing is not so bad when you see the positive aspect of opportunity looking back at you.