Is it Possible to Recession-Proof Your Trading Portfolio?

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There are legitimate concerns that another recession, coupled with a bearish market for stocks, is on the horizon. Recessions are part and parcel of the global economic cycle. There will always be periods of uncertainty where financial investors become concerned. It’s how you deal with that within your trading portfolio that can limit potential losses and leave you in good shape to prosper once the global economy recovers.

The good thing is that it is possible to try and ‘recession-proof’ your investment portfolio. There are certain stocks that will be resilient to an upcoming recession, so it’s important to pinpoint these and add them to your watchlist within your trading platform. First and foremost, the company stocks that will be safest to invest in during a recession are well-established firms that have weathered recessions in the markets before and are well-capable of doing so again.

It’s a good idea to do your homework and seek out companies with robust balance sheets – hunt out companies that are listed on the stock exchange with good cash flow and minimal external debt. These firms will be far more capable of funding their operations amid an economic downturn. By contrast, you might prefer to use a trading platform that allows you to ‘short’ company stocks using contracts for difference (CFDs). This allows you to ‘sell’ the price of a company if you believe their balance sheet suggests they’ll struggle to repay their debts and the necessary overheads to fund their ongoing operations.

Other defensive stocks suitable for recession-proofing an investment portfolio include consumer staples that are likely to remain resilient. For instance, telecommunications companies that have tens of millions of mobile users are likely to survive as consumers rely heavily on their services. Investing in physical commodities such as natural resources is always an avenue for consideration amid a recession. The value of commodities typically fall when a recession is brewing, as demand slows for such resources given the sluggish global economy. However, it’s a great time to buy commodities like gold as their value and demand will rise once again when the economy recuperates, and output takes off.

As a financial investor, it’s always important to put your consumer hat on when trying to recession-proof your trading portfolio. Consumers still spend some money regardless of whether the economy is up or down. If the economy is struggling, consumers will rein it in and attempt to seek the best quality products and services at the cheapest price. Investing in discount retailers rather than high-end department stores is a clever tactic. During the previous recession, discount retailer Walmart posted income growth in three successive years between 2008 and 2010.

Of course, you don’t want to overhaul your entire investment portfolio to ride out a recession. To do so would severely restrict your potential ROI in the event of economic recovery. Focus on a small chunk of your investments in recession-proof assets so that you can have peace of mind that your other assets are hedged during the economic downturn.

 

Disclaimer: This content does not necessarily represent the views of IWB.

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