Nobody likes to think about the possibility of an economic downturn. During these occasional periods of economic slowdown, people suffer from declining asset valuations, unemployment, and other devastating effects.
You can shield yourself from a recession by rebalancing your portfolio in advance. So hypothetically, if you see a recession coming, you might be able to spare yourself from the worst effects, or even benefit.
Obviously, recessions are hard to predict. But if you have a strong feeling that an economic downturn is on the horizon, rebalancing your portfolio could give you a sense of peace, at the very least.
The Smartest Move: Prepare for Everything
We don’t know when the next recession is coming or what it’s going to look like. There could be a devastating recession starting next week, or we might have another 15 years of worry-free economic growth. If someone tries to tell you they know what’s going to happen next, they’re either lying or they don’t know what they’re talking about.
Accordingly, the best move is to prepare for everything. If your portfolio is sufficiently diversified, you’ll be shielded from practically every conceivable economic event. That means investing in many different assets, such as rental properties, stocks, bonds, precious metals, commodities, and even alternative investments like crypto. It means investing in many different economic sectors, including finance, healthcare, utilities, consumer technology, biotech, and manufacturing. It also means keeping at least some of your portfolio liquid, so you maintain some investing agility while making sure you have access to funds in an emergency.
Why We Can’t Predict a Recession
Why can’t we simply predict when the next recession is coming?
There are several reasons.
- Recessions are complicated. Economics is a complicated field, and recessions are complicated phenomena. Recessions are usually a byproduct of many different convergent factors, such as slowed economic growth, general pessimism, international political events, and monetary and fiscal policies.
- Intangible factors matter. Economists might point at the yield curve or other troubling signals in the economy as objective markers that a recession is in the near future, but we need to keep in mind that intangible and hard to measure factors also play a role in shaping the economy. For example, objective metrics won’t trigger a recession if investors are still so optimistic that they keep buying into the market. Markets aren’t always rational.
- Economic developments are sometimes unprecedented. Many people like to use history as a kind of crystal ball for the future, using historical precedent to predict what will happen next. But as we’ve seen even in the past few years, historical precedent doesn’t always matter; some economic developments are totally unprecedented.
- Downturns can take many forms. Recessions and milder economic downturns can take many different forms. Sometimes they’re short, sometimes they’re long, sometimes they’re mild, and sometimes they’re severe. Accordingly, it’s almost impossible to prepare perfectly.
“Safe” Recession Bets
If you’re looking for relatively safe investments in a recession, look to the following (in addition to diversifying your portfolio):
- Blue chip stock funds. Blue chip stocks are shares of large, highly reputable, financially sound companies that have typically been around for decades. These are companies that are big enough and experienced enough to withstand temporary economic issues, and they make for excellent long-term plays. If you purchase index funds containing those stocks, you’ll naturally diversify your holdings.
- Utility and other necessary companies. No matter how bad the recession gets, people are still going to need utilities, waste management, health care, and other consumer staples. Accordingly, the companies that provide these types of products and services tend to perform well even during a recession.
- Bonds. Bonds are known as some of the safest assets to invest in, even if they don’t have as much of a return as stocks or real estate. There are excellent ways to reduce the total risk of your portfolio.
- Precious metals. Many investors turn to precious metals like gold and silver as a safe haven during times of economic uncertainty. Just keep in mind that precious metals can also be volatile, and economic downturns are not a guarantee of positive returns here.
No matter how much economic knowledge you have, or how much experience you have as an investor, it’s fundamentally impossible to predict the next recession. If anyone could predict the next recession with any degree of accuracy, they would be capable of becoming rich overnight.
Instead, we must all live in a world with doubts and uncertainty, and prepare our investing strategies accordingly. There are several assets that have a tendency to perform well in recessionary and economically challenging environments, though they still aren’t a guarantee of success during tough times. That’s why the best strategy is to diversify your portfolio and remain ready for anything.
