Sep 07 2007

Make sure your investment portfolio is recession proof by following the tips provided here.

Every few years, the US economy seems to cycle around and take a turn for the worse. Oftentimes, these dips are small and the economy quickly recovers. Other times the downturn lasts a bit longer and we endure a recession. Recently, as the economy has been suffering due to the mortgage crisis and credit problems, there has been a lot of talk about another recession. Whether or not this plays out, you should be ready to make your investment portfolio solid and able to withstand an extended downturn.

Be Prepared. The first thing you really need to do before you look at the market and the economy for answers is to look at your own situation. Where can you trim expenses. Are you paying out a lot in interest through credit card debt and other loans. As the economy turns down, you need to position yourself to weather the storm. You cant be prepared to make it through the lean times if youre paying half your income towards interest debt and unnecessary incidentals. See this article for more advice on saving money for a financial emergency to get you started.

Limit Your Financial Exposure. You really want to start playing defense when a recession looms on the horizon. Dont be aggressive with risky stocks or other high risk investments. Instead, put your money where it will be safe. You dont have to drop it all into government bonds, but a few short-term bonds might be a good idea. Consider looking to invest in stocks from large companies with a solid financial history. These firms may also lose a bit in a touch economy, but they are certainly going to be more resilient than a small start-up in an unsteady industry.

Diversify your Holdings. Diversity in your financial portfolio is always a good idea, but when a recession hits its a necessity. You want to make sure your stock holdings cover a large range of industries, especially those less prone to cyclical moves. Industries that sell consumer staples or those that deal in health care tend to hold up in a slowdown. You want to avoid industries that focus on luxury items or discretionary spending goods. Ultimately, diversify your holds and be prepared to invest in some short-term bond, bank CDs, international stocks and other domestic, large-cap, dividend-paying stocks.

Lock in Your Rate. When the economy slows down, the Fed usually begins to bump down interest rates to revive things again. You dont want to be stuck in a savings account where the interest rate continually falls. Instead, consider a 6 or 12 month CD that you purchase before the rates are dropped. You can also consider government agency bonds as they tend to pay at a fairly consistent, and relatively high, rate of return when others fall.

You may not be able to completely avoid losing a little money in a recession, but you can probably slow the bleeding and possibly avoid any loses at all. You simply have to have a little foresight and manage your investment portfolio accordingly.