A 2 Step Plan To Recession Proof Your Portfolio
While the market has steadily moved higher over that last six months, many analysts and traders have been calling for a trend reversal. Well 50% later, they are still waiting for that pullback.
Hey.. if you say something enough times eventually it will happen. After all stocks don’t just move in one steady direction, so they will be proven right soon enough… just not when they first thought. I’m sure they’ll end up on some news channel claiming they saw it coming soon enough.
That being said, does it even matter whether the market is moving up or down?
Certainly it may be easier to pick winning stocks in an up market, but that doesn’t mean there are no good opportunities in a down market, and it doesn’t mean you need to go sit on the sidelines either.
All you really need to do is recession proof your portfolio.
I call it recession proof, but it doesn’t mean its only for a recession. Just anytime there is a down market. We’ll break down into 2 sections: the plan and what stocks work in the plan.
The Recession-Proofing Plan
The key to making solid market returns, is diversification. Whether you’re holding 100 stocks or just 2, the key is to spread the exposure. You don’t want all your stocks in one basket (i.e. every stock related to financials), but I’m sure you already knew that.
While that is all great, diversification as is, simply states you own a basket of stocks with risk spread around, so you’re ready for whatever the market throws at you. What usually gets lost or overlooked in the translation is money management.
What good would diversification, as is, do if you own the same amount of shares for 5 unrelated stocks. If some are going down others go up. The trend continues, and you’re really not making great if any returns throughout any type of market.
No, the key to really recession proofing your stock is combining diversification with money management. When you feel the market is turning, dump or release shares of stocks you think will get hurt and build up on ones you feel should perform well.
Dump your winners and pick up more of your losers.
If that seemed too easy, its because it really is. Now we need to tackle the second part of this equation: what stocks are good to invest in down markets?
Finding Stocks That Work In A Down Market
The typical answer is usually defense stocks, but while the markets were getting slaughtered through the last half of 2007 and all of 2008, many of these same defense stocks were getting pummeled as well. So if this is the answer, then perhaps we should sit on the sidelines.
A question I like to ask myself when determining what stocks would be good in a down market is “where would consumers turn to”? I felt that more people would be dumping their cable and switch to watching shows online and using Netflix (NFLX) for movies. Guess what it worked. During the same time the market and many of those defense stocks were getting torn apart, Netflix was up 23%.
With horrible employment numbers about to be released, maybe that same move will happen again.
Also check out products that will always be consumed. Think of items one would buy in a grocery store. Look at companies like Clorox (CLX) and Johnson and Johnson (JNJ).
One more side note to keep in mind… do not get scared of red. Markets and stocks alike do experience pullbacks, and if you’re comfortable with your stocks, then try to bear it through. For all we know, it might just be a spring for your current holdings to bounce right off of and move higher.
What stocks or methods do you like to use in a down market? Leave a comment below.
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