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Recession Proofing Portfolio

  • Last Updated:
  • Apr 9th, 2019 11:34 pm
Member
May 10, 2009
213 posts
88 upvotes

Recession Proofing Portfolio

Just wanted to get peoples opinions/ideas on recession proofing your investment portfolio. As the yield curve has inverted, a recession may be coming in the next few months to a couple years. I am trying to be more cautious and attempting to “recession proof” my portfolio the best that I can. For references, I am currently 85% in stocks and 15% cash.

Scenario 1: I’ve been told that owning 10 year US treasury bonds typically do not decline as much as stocks in a recession. Would it be wise to allocate a portion of your portfolio (say 25%-30%) into treasury bonds/treasury bond ETF’s to offset the inevitable decline in prices?

Scenario 2: Sell some of the more riskier stocks in your portfolio to bump portfolio cash (bump that up to 50% or so) and slowly buy stocks of high quality companies (good balance sheet, high cash flow, low debt) as the prices of stocks continue to decline. For example, stocks in consumer staples typically also do well in recessions as households do not cut out these goods out of their budget.

Scenario 3: I do not own any gold in my current portfolio but understand that owning gold in a recession is typically favoured?

Would love to hear your opinions/ideas. Thanks in advance guys!
8 replies
Deal Fanatic
Nov 9, 2013
5885 posts
7465 upvotes
Edmonton, AB
I think all three options would work as essentially you are diversifying into non (less) correlated assets. All three options are probably actively being pursued by other investors as well, as many share your fears.

You could also consider rotating into "recession resistant" sectors (i.e. utilities, telecoms, consumer staples) although most of these sectors are actually quite expensive at present.

The other thing you could consider would be "alternative assets" like real estate, infrastructure, private equity (generally not directly available to retail investors), etc.
Buy right, hold tight. Keep calm and go long.
Jr. Member
Nov 21, 2015
181 posts
34 upvotes
Vancouver
Instead of go with 70/30 or 80/20 portfolio.

Pick something like 55% bonds, 33% stocks, 4% broad commodities, 3 % gold and 5% REITS.
Deal Expert
Jan 27, 2006
21844 posts
15620 upvotes
Vancouver, BC
The problem is timing the actions. According to many reports I've seen, as you have stated, the inversion of the curve may indicate a recession 12 months to a few years out. During that time frame, the statistics show that returns of 15% to 30% can happen! So, if you go conservative too early, you will be missing out on large gains in the various markets.

Of course, there's the alternative school of thought as well - don't try to time anything and just accept the bump in the road... Recessions last a relatively short period in time and while they have a drop in prices, those prices (given good companies) typically rebound off their lows within a year of the recession starting and start approaching their previous pre-recession prices shortly afterwards (ie within another year for a total of 2 years) - you'll have two years of 'dead' time. So, if you decide to get out of the market now in order to prep for that recession which may or may not be coming, you will miss out on the 15% to 30% upside. So, unless you need your money in that two year dead zone, it might be a wash as far as your investments go given a few years down the road.

What might be a better approach is to:

1. Take a sanity check on your portfolio to see what stock's story is intact - ie is the reason why you bought the stock still a good reason to own it? And is it still doing what you expected it to?
2. Trim a bit off the big winners and rebalance. You might want to leave it in cash or a money market fund of some sort.
3. Hold off on any of the money you would have normally invested from your savings.
4. Put any dividends you have into cash rather than dividend reinvestments.
5. Create a shopping list of stocks to buy if the prices do crash.

This way, you will slowly increase your cash position without doing anything too far off base from what's working now. If a recession does come, you will have some extra funds to invest and a list of things to invest in.
Sr. Member
User avatar
Jul 25, 2018
784 posts
1241 upvotes
Milton, ON
My personal take is to ignore the headlines as you will never be able to consistently time the market. You could move everything into cash now but you'll kick yourself if it continues to go up. If your stocks crashed 50%, you'll be happy you sold but when will you know when to get back in? A 10% decline? 25%? 40%? Even if WWIII were to happen tomorrow, stick with your asset mix.

I'm in the same boat at a similarly aggressive 90% stocks and 10% cash and I only change this mix to rebalance. The whole point of investing aggressively is to achieve long-term capital growth. If you got scared out of the market everytime someone said so, you're succumbing to your emotions and not letting your portfolio do what you designed it to do. If you truly don't need the capital for a long time, stay the course. Otherwise, you took on too much risk and should reevaluate your asset mix.
Deal Addict
Jul 8, 2013
4498 posts
6936 upvotes
Somewhere in AB
I recession-proof my portfolio by not even caring what's the actual market value is, and buying every month no matter what.
"You don’t need to sacrifice stability, common sense, and comfort if a 1% bond still lets you achieve your financial goals." M. Housel
Sr. Member
Nov 16, 2013
917 posts
330 upvotes
GTA
TuxedoBlack wrote: I recession-proof my portfolio by not even caring what's the actual market value is, and buying every month no matter what.
And that’s the simplest winning strategy which is difficult to follow due to Greed or Fear
Sr. Member
User avatar
Apr 7, 2007
852 posts
474 upvotes
Calgary, AB
Move into companies that will do well with declining interest rates like REITS, maybe buy some preferred shares (I'm going to add BBD.PRC), more allocation to bonds.
Don't do anything drastic just slowly position yourself for declining interest rates... but who knows? It's impossible to time the market.

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