After over a decade of steady growth, the economic cycle is due for a downturn, with high concerns of a recession.
Investors who have enjoyed rising appreciation on their assets are also getting antsy and fear an investment downturn as coronavirus concerns continue to weigh heavily on the economy. For anxious investors, now is a good time to review how to recession-proof your portfolio.
What Is a Recession?
Recession is a term that describes a specific economic state that experiences declining activity over a specific period of time. There are several factors to monitor that measure the possibility of a recession and, when combined, can tell the story of how stable our economy is in a given period of time.
According to the National Bureau of Economic Research, a recession is a period of falling economic activity spread across the economy lasting more than a few months normally seen in real growth domestic product, real income, employment, industrial production and wholesale retail sales. A recession is declared after the fact by experts at this private economic research organization.
When the KPI’s (Key Performance Indicators) of economic activity dropped but begin to rise again, the economy is said to be recovering. In the early stages of recovery, economic activity is usually below normal and can last into expansion. Ultimately, recessions are an inevitable part of the natural business cycle and are usually followed by economic strength.
Are we in a Recession?
Recession talk is everywhere and experts are saying we may already be there. "U.S. equities fell into bear market territory for the first time in more than 11 years, plunging a dizzying 32% from record highs registered just one month ago and ending the longest bull market in history," says George Mateyo, chief investment officer at KeyCorp in Cleveland, Ohio.
The "coronavirus crash" has been one of the swiftest peak-to-trough market declines ever, and the hibernating bear has come roaring back in a major way."
"Stay disciplined and seek opportunities to upgrade portfolios," Mateyo recommends. "Don't succumb to panic."
As the spread of the coronavirus pandemic continues to grow, there is an expectation that unemployment will increase (already 15,000,000 have filed for unemployment as of this writing), consumer sentiment and purchasing power will diminish and federal and local government stay-at-home mandates will stunt business growth. In the face of these estimates, here are some pro-tips to help you take control of your investments in the wake of a recession.
What to Invest In During a Downturn?
A fraction of your portfolio should be allocated to buy & hold real estate. Receiving a consistent flow of cash can provide investors stability during an economic downturn. That way, when asset prices fall, the investor isn't selling at market bottom.
Inflation is usually followed by a recession, but in this case, it is looking like it will. In order to combat inflation, the best investment strategy is Real Estate. Whether it be single family, multifamily, commercial, etc. Real Estate is proven to have a built in inflation hedge that protects your asset.
Assets that are less correlated with typical stocks and bonds may be worth considering during times of uncertainty, says Chris Rawley, CEO of Harvest Returns in Fort Worth, Texas. Harvest Returns is an online platform for agriculture-based investments.
Several assets with low stock and bond correlations are gold and certain commodities such as timber. Other less correlated assets include the real estate niche.
With real estate crowdfunding, hypermarket segmentation is available. Investors can choose their property type and geographic region when investing in real estate. EquityMultiple is one example of a real estate crowdfunding. Fundrise and Groundfloor open targeted real estate investing to nonaccredited investors as well. For easier real estate investing access, real estate investment trusts, known as REITs, come in many varieties and span several sectors. Let’s not forget about syndication! For more info on syndication click here.
The health care and senior-living sector is usually a solid investment, but we need to look at what Coronavirus is doing, specifically to the older generation. Will we see the same returns we’ve been seeing in senior-living investments? That is still yet to be seen, and precaution is highly recommend when considering this investment.
Self-storage also seems to be a pretty recession proof investment. People don’t suddenly have less stuff when a recession hits and they are less likely to stop paying and take their stuff out of storage due to the hassle of moving it somewhere else.
For equity investors, recession-proof stocks are those more likely to hold up during market turmoil. Health, garbage and basic consumer products could fit the bill. Sample recession-proof stocks include Walmart (WMT), Johnson & Johnson (JNJ) and Waste Management (WM). These are stocks that perform best during a recession.
It's wise for investors to remember that in the short and intermediate term, investing is volatile. That reality underscores the difficulty in removing the risk of investment losses. However, moving forward, real estate investments specifically, are poised to be the most lucrative that we’ve seen in the previous decade and makes for considerable thought when luring the idea of capital investments.
Investing Strategies: Protect Your Portfolio!
Particular categories of people can be impacted on varying scales, so each investor has to plan accordingly for recession-proofing their finances based on their investing objectives and risk tolerance.
The market is difficult to predict, so diversifying your portfolio is an effective way to manage volatility. When assets are allocated in noncorrelated markets, there is a balance of risk in your investments. This diversification can be achieved through a mutual fund that holds a combination of stocks, bonds, real estate, emerging markets, etc. or a separate combination of the like.
As the markets become more volatile, another approach can be rebalancing your portfolio or resetting asset allocations, which aims to keep the portfolio in line with the initial risk and reward profile with which it was initially created. People who are employed in a reasonably recession-proof job, such as health care, government or education, should consider increasing their portfolio size, particularly through their retirement plans, like a Self-Directed IRA.
Retired investors and those planning on retiring soon should keep one to two years of cash available in case of a recession. It's always wise to have an emergency fund and savings on hand. All investors, no matter what age, should keep some form of reserves for you and your investments. It ensures capital preservation in a downturn, where, in the case of real estate, if tenants suddenly can’t pay for a short-term, you are properly capitalized to withstand the dry season.
If the markets turn for a recession, it can be disheartening to watch the value of your financial portfolio decrease. Emergency funds can be a safety net to pay for expenses until the value of your other assets rise again.
Timing the Market Is Next to Impossible
Predicting when the recession will occur is nearly impossible, but prepping for one is a responsible move. One can look into historical economic cycles for how investments act before, during and after a recession; however, this goes outside of the limits of the investor's efforts.
Conversely, for most investors, understanding one's risk tolerance and time horizon and investing accordingly is the best way to handle a market decline. Ultimately, timing the market is a near impossible task. Research has shown that timing the markets eventually leads to lower returns than selecting a sound and diversified asset class and staying the course - such as multifamily syndication.
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