Skip to content

Protect Your Portfolio in a Recession

By Michael Jamison, Managing Partner & Portfolio Manager

Recession Risk Factors

Elevated inflation has triggered a massive tightening cycle by the U.S. Federal Reserve. To date, the American consumer — who drives about two-thirds of the U.S. GDP — has proven resilient. But, as savings accumulated amid pandemic shutdowns and boosted by stimulus checks dry up, consumers may well rein in their spending. And as corporate profits get squeezed due to rising input and financing costs, expenditures for both investments and hiring may slow.

Historically, reduced spending and rising unemployment are the factors that produce recessions. If that is indeed the direction the economy is headed in, how do you protect your wealth from receding?

How to Protect Your Portfolio

With recessionary concerns looming, you may be tempted to pull your investments out of the market until the storm passes. However, accurately predicting the future course of the markets is very difficult, and deviating from your investment strategy can be costly over the long term.

According to data published by JP Morgan, “over the past 20 years, seven of the stock market’s 10 best days occurred within just 15 days of one of the market’s 10 worst days. If an investor missed those 10 best days because they were attempting to dodge the down days that surrounded them, their average annualized return amounted to +5.7%. But what if that same investor stayed invested throughout the entire period, taking the bad days with the good? Their annualized return was +9.9% – almost double that of the market timer.”

Diversifying and rebalancing your investments, rather than removing your wealth from the markets entirely, can be the key to coming out on top of a recession.

Continuously Review Your Portfolio

Some stocks and sectors will tend to fare better than others during tough economic times. For example, consumer staples, utilities, and healthcare are things consumers cannot do without. So, in anticipation of a recession, review your portfolio to identify any potentially vulnerable investments and consider bolstering it with high-quality stocks that can serve as a ballast to your holdings.

When the markets begin to recover, it can be an opportunity to swap out underperforming positions. Additionally, in taxable portfolios, realized losses may be paired with realized gains, netting you a lower tax bill.

Keep Cash on Hand

Recessions can be stressful. But one strategy has provided Americans peace of mind during downturns since the Great Depression: stashing cash under the mattress.

No, we don’t mean sleeping on a literal bed of money. But having ready liquidity to cover unforeseen expenses or cost of living in the event of diminished income or job loss will help you sleep at night. A good rule of thumb is to keep 6 months’ worth of living expenses in cash as an emergency fund. Doing so can protect you from having to sell securities at an inopportune time due to liquidity needs, possibly locking in losses.

Need help re-designing a recession-ready portfolio? The advisors at Griffin Asset Management can partner with you in structuring an investment strategy that can serve you in all market cycles.