Strategies for Strengthening Your Portfolio Against a Recession

Strategies for Strengthening Your Portfolio Against a Recession

Recession-proofing an investment portfolio is important for high-net-worth individuals to preserve their wealth during economic downturns. While no strategy is foolproof, there are several ways to minimize the impact of a recession.  Here are 10 tips from ViaWealth, a Minneapolis financial advisory firm:

  1. Diversification
  2. High-Quality Bonds
  3. Dividend-paying stocks
  4. Defensive sectors
  5. Cash reserves
  6. Alternative investments
  7. Gold and precious metals
  8. Disciplined rebalancing 
  9. Staying focused on long-term goals
  10. Seeking professional advice from a fiduciary financial advisor

Let’s dive into each tip in more detail.  

Read our latest Guide: Wealth Management for Affluent Investors-How to Invest Your Assets in Volatile Markets


There are several diversification tactics you can use as a way to recession-proof your investment portfolio.  

  1. Allocate your assets across various investment classes, such as equities, bonds, real estate, and commodities, to minimize the impact of market fluctuations in one asset class. 
  2. Investing in dividend-paying stocks with a history of consistent payouts. Investing in blue-chip companies with strong balance sheets is another tactic that may  provide a stable income stream and act as a buffer against market volatility. 
  3. Incorporating alternative investments such as real estate, private equity, hedge funds, and venture capital can offer additional diversification and the opportunity for increased gains. 
  4. Consider global investing to help mitigate risks in a particular country.

High-Quality Bonds:

Another tactic to consider is using high-quality bonds in your portfolio during a recession that may include rising interest rates for new bonds.  

  1. One tactic involves allocating some of your investments to investment-grade corporate bonds, which typically exhibit lower default rates and more reliable income streams than lower-rated bonds. 
  2. Consider whether incorporating Treasury Inflation-Protected Securities (TIPS) fits your investment strategy.  TIPS can provide a hedge against inflation and further stabilize your portfolio during economic downturns with higher inflation rates. 
  3. Diversifying across a range of bond maturities is another prudent approach, as it helps manage reinvestment rate risk by balancing producing a range of maturities. 
  4. Investing in high-quality municipal bonds can offer tax advantages while providing additional stability to your portfolio. 

Dividend–Paying Stocks:

Dividend-paying stocks may offer several benefits to you, making them an attractive option, especially during economic uncertainty.

  1. Regular income: Dividends can provide a steady income stream, which can be especially appealing if you are looking for additional cash flow for your retirement years. This income stream can be reinvested or used to enhance your standard of living. 
  2. Compounding returns: Reinvesting dividends into purchasing more shares during market downturns can enhance the benefit from the impact of compounding. Over time, this can significantly increase the market value of your portfolio. 
  3. Lower volatility: Dividend-paying stocks tend to be less volatile than non-dividend-paying stocks. That’s because the dividend can insulate your portfolio from some market volatility.  
  4. Capital appreciation potential: Besides the income generated from dividends, dividend-paying stocks can also appreciate over time, providing you with realized and unrealized capital gains.
  5. Inflation protection: Dividend-paying stocks can hedge against inflation. Many companies periodically increase their dividend payouts to keep pace with all or part of the impact of inflation. This can help protect the purchasing power of your income stream.
  6. Tax advantages: In some countries, dividends may be taxed at a lower rate than ordinary income or capital gains, providing a tax advantage.
  7. Dividend-paying stocks: During bear markets or periods of economic uncertainty, dividend-paying stocks can be more appealing due to their income potential and reduced price volatility.

A word of caution: Investing in dividend-paying stocks also has risks. Before making any investment decisions, you should talk to a financial advisor about your goals and risk tolerance.  Here are some potential risks to consider with this type of investment: 

  1. Dividend Cuts or Eliminations: One of the primary risks of investing in dividend-paying stocks is the potential for the company to cut or eliminate its dividend payments. Dividends are not guaranteed and are often the first thing to be reduced when a company faces financial difficulties. If a company cuts its dividend, it can substantially decrease the stock’s price, causing capital losses for the investor.
  2. Slow Growth: Companies that pay high dividends often have slower growth rates. Instead of reinvesting their profits into the business for expansion, research, and development, they’re paying them out to shareholders. This can result in slower stock price appreciation over time, which could offset the benefits of receiving dividends.
  3. Tax Efficiency: In many jurisdictions, dividends are taxed more than long-term capital gains. This means that investors in high tax brackets may be better off investing in growth stocks that do not pay dividends but provide returns through capital appreciation, which may be taxed at a lower rate.
  4. Interest Rate Risk: Dividend-paying stocks, especially companies in sectors like utilities and real estate, can be sensitive to interest rate changes. When interest rates rise, these stocks become less attractive compared to other income-generating assets like bonds, potentially decreasing their price.
  5. Over Concentration in Certain Sectors: Dividend-paying stocks are often concentrated in certain sectors of the economy, such as utilities, consumer staples, and real estate. This can lead to a lack of diversification in an investor’s portfolio, increasing the risk if those sectors underperform.

Defensive Sectors:

Stocks in industries like utilities, healthcare, and consumer staples are more stable during periods of economic uncertainty. Consumers still need electricity, healthcare, and food, so the prices of the stocks of companies that provide these essential services and products tend to be more stable. 

Cash Reserves:  

Maintaining a six-month cash reserve during normal markets is a standard financial planning recommendation. Investing in cash reserves (money market, t-bills, CDs) during down markets is a way to protect the principal. The interest rates may not be that great, but the goal of this investment strategy is to protect the principal from negative rates of return.

Alternative Investments: 

Alternative investments, such as real estate, precious metals, commodities, private equity, and hedge funds, may provide your portfolio with additional diversification and potentially higher returns. But, it’s important to note that these assets may come with increased risks and reduced liquidity.

Gold and Precious Metals:

Gold and other precious metals, such as silver and platinum, are often considered a hedge during a recession for several reasons:

  1. Historically, gold and other precious metals have tended to maintain or even increase value during economic uncertainty when there are more buyers. 
  2. These metals are often considered safer investments, especially when other assets like stocks or bonds may be experiencing significant declines.
  3. Precious metals have a limited supply, which can make them more valuable during periods of economic instability. The rarity of these metals helps maintain their value, and when demand increases during a recession, their prices also may rise.
  4. Gold and other precious metals are tangible assets that can be physically held and stored. This characteristic provides a sense of security for investors who may be wary of investing in more abstract financial instruments such as stocks or bonds during uncertain times.
  5. Investing in precious metals can provide diversification to an investment portfolio. During a recession, stocks and bonds may experience significant declines, while gold and other precious metals may hold their value or appreciate. 
  6. Gold and other precious metals are often considered a hedge against inflation. During periods of high inflation, the purchasing power of paper currencies may decrease, while the value of precious metals may increase. These metals have intrinsic value and are not subject to the same inflationary pressures as currencies.

Here are some of the risks and downsides to consider:

  1. Lack of Passive Income: Unlike stocks or real estate, gold doesn’t provide a dividend or rental income. It’s a purely speculative investment where the investor is betting on the price of gold increasing over time.
  2. Storage and Insurance Costs: Physical gold requires storage and insurance, which can eat into potential profits. While gold ETFs and similar products don’t have this issue, they come with fees.
  3. Illiquidity: While gold itself is a fairly liquid asset, if you’re investing in physical gold (bars, coins, etc.), it can be less liquid than other investments. This means it can be harder to sell quickly without losing some value.
  4. Price Volatility: While gold often holds its value well over the long term, its price can be quite volatile in the short term. Economic events, changes in supply and demand, and fluctuations in the value of the U.S. dollar can all affect the price of gold.
  5. Opportunity Cost: The money you put into gold is money that you need to invest elsewhere. If the stock market, real estate market, or other investment opportunities perform well, you could miss out on those gains.
  6. Economic Improvement: Gold often performs well during times of economic uncertainty. If the economy improves and investor confidence grows, gold prices could fall.
  7. Regulatory Risk: Changes in regulation or taxation could impact the value of gold or the cost of trading it. For example, import/export restrictions, changes in monetary policy, or new taxes could affect the gold market.
  8. Market Manipulation: The gold market is not immune to manipulation, which can lead to artificial price inflation or deflation. This can make it difficult for individual investors to predict and respond to market changes.

Disciplined Rebalancing:

Rebalancing your portfolio to maintain your preferred asset allocations can reduce risk and improve future opportunities for higher returns. 

For example, your portfolio is allocated 60/40 (stocks/bonds), and stocks outperform bonds, so your current allocations are 75/25. Rebalancing to 60/40 requires you to sell stocks and buy bonds.

Focus on Long-Term Goals:

As an accomplished individual with considerable assets, it’s crucial to concentrate on your long-term objectives rather than making impulsive decisions based on short-term market fluctuations, which may jeopardize your long-term strategies. Avoid making financial choices driven by emotion, and remember how difficult it is to predict short-term movements in the securities markets.

Seek Professional Advice from a Fiduciary Financial Advisor: 

Collaborating with a Minneapolis financial advisor may offer guidance in developing a customized investment approach aimed at safeguarding your assets amidst economic downturns

  1. Experienced, fiduciary financial advisors have specialized knowledge to help you make informed decisions, especially during uncertain economic times.
  2. Fiduciary financial advisors are legally obligated to act in their client’s best interest, prioritizing their needs over their own. This ensures that the advisor’s recommendations are always based on your financial goals, risk tolerance, and long-term objectives.
  3. In times of economic downturn, a fiduciary financial advisor is equipped with the necessary skills and strategies to assess your portfolio and diversify investments. Their guidance can offer potential avenues for risk management, which may involve techniques to lessen potential losses and shield market values.In a recession, tax-efficient strategies become even more critical. A fiduciary financial advisor can help you optimize your tax situation by recommending tax-saving investment vehicles, tax-loss harvesting, and other strategies that reduce your tax liabilities. 
  4. During recessions, asset prices may potentially depreciate, potentially leading to investment opportunities. A fiduciary financial advisor can assist in recognizing these potential scenarios, intending to leverage reduced prices to enhance wealth over time potentially.A fiduciary financial advisor may offer a broad scope of financial planning services, potentially covering diverse areas of your financial life, such as estate planning, insurance, and retirement. Their holistic method might be useful for individuals seeking guidance during economic downturns and those aiming to foster financial stability.
  5. A recession can be stressful, and you may be tempted to make impulsive decisions based on fear or uncertainty. A fiduciary financial advisor can provide a disciplined perspective, helping you stay focused on your long-term financial goals and avoid making emotional investment decisions that could harm your future financial security.

The ViaWealth team are financial fiduciaries with a purpose.  Our core principle is to serve as your financial advocate so at the end of the day, you should feel more confident and in control of your financial journey.  ViaWealth’s private wealth management services are built for affluent, wealthy, high-net-worth, and ultra-high-net-worth individuals and families.  To learn more about our services, connect with us

ViaWealth, LLC is a Registered Investment Adviser. Information in this article is for educational purposes only and is not intended to be an offer or solicitation for the sale or purchase of any specific securities or other types of investments. Investing in the securities markets involve risk of principal and unless otherwise stated, returns are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before making any financial decisions. Past performance is not indicative of future performance.

More about the author: Lance Larson

Lance is the Managing Member and Founder of ViaWealth LLC.

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