Recessions are defined as a contraction of economic activity lasting at least six months. They are a relatively regular and natural part of the economic cycle. As per Kavan Choksi, it is prudent to have a plan in place for when they occur. By following a few simple tips, investors can make their portfolio recession-resistant.

Kavan Choksi marks a few tips that can help weather a recession

Recessions generally coincide with bear markets, or market declines of 20% or more. In many instances, bear markets come first, with investors anticipating an economic slowdown. Even though the average recession lasts about eleven months, it ideally takes the market more than two years to bounce back to its pre-bear peak. Hence, the very first thing investors must do is shore up their cash reserves. Unless they do so, it is possible that the investors would be forced to sell stocks during a market decline, and hence lock in losses and undercut the capacity of their portfolio to recover.

Non-retirees should consider setting aside three to six months’ worth of living expenses in an account that is relatively liquid and safe. It can be a money market savings account, short-term CD, money market fund or an interest-bearing checking account. One must also keep enough cash aside to cover any upcoming sizable expenses, like tuition payments.

Retirees need much larger cash reserves than their non-retired counterparts. Their cash reserves should ideally cover two to four years’ worth of expenses. The majority of retirees are not able to wait for their investments to rebound. In case one does not have an adequate amount of money on hand, taking a significant withdrawal in a down market may increase the longevity risk to a good extent.

As the market falls during a recession, most investors are naturally inclined to want to wait until it recovers to put more money in. However, if one can afford it, they should be doing just the opposite. In many situations, bad news can be the best friend of an investor. Recession often helps investors to buy stocks at a marked-down price. In addition to buying shares at a discount, economic downturns also provide a good opportunity to make strategic adjustments to the portfolio. Investors especially must consider investing in:

• High-quality stocks: Companies that have low volatility, strong cash flow, positive earnings and low debt ideally outperform when recessions hit and investors go for businesses that have ample financial cushions.
• Lower-volatility sectors: Defensive sectors are generally less volatile than the broader market. Hence, they also have a higher potential to outperform when returns go negative.
• Fundamental index funds: Such index funds weigh holdings by a variety of fundamental factors. These factors include adjusted revenue, dividend yields, and earnings. Fundamental index funds typically favour value relative to market-cap-weighted index funds.
• Longer-maturity bonds: As interest rates go up, investors should try to shift their long-term fixed income allocation to longer-maturity bonds.

As per Kavan Choksi, in a recession, it generally makes sense to sell off some investments and buy others as part of regular portfolio maintenance.