Is Your Portfolio Protected Against a Recession?
Updated: Mar 29
Before the coronavirus hit, there were already indications of a potential recession. The yield curve inverted last August, and manufacturing data has been weak for months. Now, it appears that the American economy will be plunged into an economic downturn right away because of the global pandemic. If you want to navigate this economic contraction with ease, diversifying your portfolio is one of the best things you can do.
Buy Consumer Staple Stocks
During an economic downturn, consumer staple stocks are a wise investment. People always need to buy toilet paper, eat food and heat their homes. Consumer staples and energy are going to be the main things people buy because they have to buy them. No matter how bad a downturn gets, companies like Clorox and Colgate-Palmolive are probably going to sell a similar amount of laundry detergent, shaving cream and toothpaste. If the downturn gets so bad that people stop buying toothpaste and food, your portfolio will be the last thing you have to worry about. While people may avoid expensive luxuries like a new car or a facial, there are affordable luxuries they will still buy during economic downturns. For example, people will still buy Coca-Cola and Hershey products. These little luxuries might not be necessary, but they are cheap enough that people will still purchase them. Most people are not going to skip drinking an evening soda just because they are living off of unemployment benefits. While they may avoid going to Starbucks, they will still buy Folgers and Maxwell House coffee.
Consider Investing in Real Estate
Another way you can protect your portfolio is through real estate investing. During a downturn, real estate allows you to achieve your income generation and diversification goals. Often, real estate becomes a safe haven when the market is doing poorly. During the last recession, a housing bubble caused the downturn. Because of this, many investors have a negative connotation about real estate that makes them avoid property investments. In reality, real estate investments increased in value during the last three out of five recessions. In addition to generating income, real estate investments may also grow in value during a downturn. If other investors are forced to sell their properties, you may be able to scoop up commercial and residential properties at a low price. One of the major reasons why people invest in real estate is because it allows them to generate income. Real estate investment trusts (REITs) can provide you with dividend income. If you own a property directly, you can pocket most of the rental income from it. Unlike the stock market, rent is always due at the end of the month. As an added benefit, real estate can also protect your investments from changing interest rates and inflation. When someone renews their lease, you can always raise their rent to keep up with inflation. In general, real estate offers more flexibility than bonds and stocks. Because real estate has a low correlation to the stock market's fluctuations, it is less volatile and offers more consistent returns. If you are interested in earning a profit, real estate properties may outperform stocks and bonds. While past performance does not guarantee how well an investment vehicle will do in the future, real estate is more likely to hold its value if the rest of the economy falters. People need a place to live, which means they are still going to pay rent during a downturn. While commercial properties are risky because businesses may struggle to stay afloat, residential properties tend to perform better.
Invest in Self-Storage Units During Downturns
While the 2008 financial crisis caused homeowners to lose a lot of equity in their homes, single-family rental assets were positive as a sector. Multifamily properties and self-storage units have historically been durable during a downturn. As you start diversifying your portfolio, consider investing in self-storage units. Whether the economy is up or down, self-storage units tend to perform well. When the economy is booming, people keep buying items and need more storage space. Once the economy falters, people need to rent storage space as they downsize. If you own or invest in self-storage units, you can protect your portfolio from downturns.
Reduce Your Debt Burden
If you are currently in debt, reducing your debt level is one of the best things you can do during a downturn. By paying off your debts, you can lower your fixed payments each month. This makes it easier to navigate the loss of a job or poor investment returns. If you have less debt, it also gives you more financial space to borrow money if you absolutely have to in the future. When you start paying off your debt, you should begin with the loan or credit card that has the highest interest rate. You can also consolidate your student loans to get a lower rate or lower monthly payment. Credit cards and car loans cannot be deducted from your taxes, so they should be paid off before you start paying off your student loans.
Liquidity Is King
Real estate investing helps you bring in a steady revenue stream during a downturn. Other than investing in real estate properties like self-storage units, you will also need to improve your liquidity. It does not matter if you have millions of dollars in stocks. If you cannot access your money when you need it, the net worth you have on paper does not matter. During a recession, you want to make sure you have more cash at your disposal. This will make it easier for you to navigate a job loss or pay cut. Having cash on hand is something that savvy investors do. Last November, Warren Buffett's company made the news for increasing its cash pile to $128.2 billion. Now, the added cash on their balance sheet will protect Berkshire Hathaway as stock prices fall. As a private investor, you can increase your liquidity by keeping some of your income in a high-interest savings account or money market account. These options earn less interest than stocks and bonds, so you will need to find the right balance between liquidity and profits.
Are You Ready for a Downturn?
Economic expansions and downturns always happen. In a market economy, you can always expect a downturn to eventually happen. As other investors scramble to earn a profit, you can avoid losses by diversifying your portfolio. Through real estate investing and other options, you can protect your savings from the ups and downs of the marketplace.