How to Protect Clients’ Portfolios from Recession

As a result of factors such as inflation and the hiking of interest rates by banks to combat it, many experts believe we’ll experience a recession by 2024.

While others argue we’ll experience economic growth in its place if we experience another quarter of GDP, a decline in a recession will be definite, leading to slowed economic growth, more conservative spending and decreased stock values. As such, it can hurt clients’ investment portfolios.

With this in mind, here’s how you can help to protect your clients’ portfolios from the symptoms of recession.

Make sure your clients have enough saved.

The number one action you can take to protect your clients’ portfolios from recession is to ensure they have enough savings to wear them through it.

To protect against potential job losses and the rising cost of living – and to deal with unexpected expenses or emergencies – some experts suggest having around 3-6 months in emergency savings. In contrast, others say up to a year or longer.

Ensuring your clients have sufficient savings is vital to protect their portfolios. If your client falls on hard times during a recession – when the value of their investments has crashed – and they don’t have enough savings to get them through the remaining economic downturn, they’ll have to cash in on their investments at the worst possible time.

Not only does this mean they’ll probably have to sell an asset for less than it costs – a.k.a. your client loses the money they invested – this also makes them miss out on the value they’ll regain and perhaps build on during the subsequent economic recovery.

So, make sure your clients have enough savings to get them through potential financial difficulty – ideally for the duration of the recession – so that they don’t have to resort to touching their savings. 

If you find out that your clients don’t have enough saved, suggest they avoid reinvesting until they do – or, as a last resort, take what they need from their investments sooner rather than later.

Emphasise the long-term.

In the same vein, you should emphasise to your clients the long-term value of their investment portfolio.

Investment portfolios are designed to grow long-term despite the inevitable ups and downs of the economy – including recessions.

Make sure your clients understand that, while their portfolio may decrease in value in the short-term, it will most likely recover in the subsequent economic upturn and stay on track to support their financial goals for the future. 

EmphasiseEmphasise that fleeing their investments during a recession will harm the health of their portfolio and detract from their long-term financial health.

Diversify across asset classes.

During a recession, the stock market crashes and a stock’s value will often depreciate by upwards of 20%.

In other words, it’s probably the hardest hit asset class during a recession, though high-yield bonds are similarly affected.

In contrast, lower-yield bonds and commodities – typically negatively correlated with the stock market – tend to outperform stocks, making them a useful diversification tool during this time. It will help maximise the portfolio’s value during a recession.

Consider migrating to more stable stocks.

More significantly, more established companies with low debt and strong cash flows tend to perform more favourably during a recession when compared with smaller, high-growth stocks.

Likewise, funds, including ETFs, comprise an array of stocks. This characteristic of funds means that if a company included within the fund fails during the recession, the many other companies listed in the fund will compensate so that clients don’t notice the loss.

With this in mind, you may consider rebalancing your clients’ investment portfolios to include a higher proportion of these stable stocks.

Of course, if your client has a high-risk tolerance and understands that less established growth stocks have a lower chance of surviving the recession – which they must to make back a client’s investment – these can still prove to be lucrative assets during the following economic recovery period.

Encourage investing in recession-proof stocks.

Of course, no stock is truly recession-proof, but some stocks are more recession-proof than others. 

For example, companies selling essentials like food, drink – and other consumer goods such as cigarettes and alcohol – tend to fare better during a recession. 

After all, people still buy these products just as much, even during an economic slowdown. They’re likely to purchase more since eating and drinking out – amongst other leisure activities – are considered luxuries, and people tend to scrimp on these things more during a recession.

This means that companies selling ‘essentials’ are better suited to withstand a recession, making them a low-risk stock option compared to corporations focused on non-essentials such as hospitality, leisure, or luxury goods, for example.