Economic recessions are commonly considered to be a difficult phase for investors as they bring up a lot of market volatility and change. However, recessions are an unavoidable feature of the global financial system. Therefore, to ensure long term success, investors need to follow strategies that help them to protect their money during market volatility. As per Kavan Choksi, investors must recognize recessions do provide unique possibilities for disciplined investors to protect and even multiply their portfolio holdings. Following a few simple strategies can help investors to protect their portfolio during economic recessions.
Kavan Choksi discusses how investors can protect their portfolio during economic recessions
Market recessions commonly involve a combination of return and risk. Recessions may diminish the value of an investment portfolio, but one must also note that they present valuable opportunities for profiting from cheap assets. Market losses are only temporary in most cases. Well-informed investors can capitalize on the situation and the positive growth prospects of the economy when it recovers. It is imperative to maintain a balanced perspective for managing this dual landscape of danger and opportunity. Having a good understanding of which sectors have higher odds of suffering during a recession, as well as which are the most resilient ones, would help people to make better investment decisions. During economic downturns, for instance, consumer stables, utilities and healthcare stocks tend to be relatively stable. Investors should try to implement techniques that can efficiently safeguard their portfolio from high losses while also positioning them to capitalize on upcoming opportunities.
Diversification is among the most efficient risk management and reduction techniques for investors. They should try to diversify their portfolio across asset classes like commodities, real estate, bond and equities, in order to reduce the impact of a market downturn on any single area. Diversification helps make sure that even if a certain component of the portfolio underperform, other areas might stay constant or even outperform, thereby mitigating the overall impact. For instance, investing in gold, real estate or bonds can help mitigate a degree of losses in case the stock market drastically falls during a recession. Apart from diversifying across asset types, it is imperative to think about regional diversity as well. International investment can provide a cushion in case the economy of one’s home country is suffering while others are stable or growing.
Kavan Choksi mentions that investors should focus on high-quality, defensive stocks during economic downturns. These stocks essentially belong to companies that offer services and commodities necessary for daily life, like consumer staples, healthcare and utilities. Businesses like these commonly have strong balance sheets and predictable cash flows. They are also comparatively less susceptible to economic cycles. Businesses that offer healthcare supplies, water, energy or essential food items, for instance, are likely to do well no matter the economic difficulties. While these companies may not rapidly grow, they are also less likely to experience substantial drops during a recession. Investors should choose quality over speculative growth stocks, in order to be in a better position to weather economic storms.