How To Recession-Proof Your Investment Portfolio

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amir baluch is the founder of financialwellnessmd, which offers a variety of financial educational materials for medical professionals.


Reading: Recession proof portfolio

The vast majority of people’s financial and retirement plans are not prepared to weather a recession or similar economic downturn. How can you, as an investor, minimize or stop the damage, avoid being wiped out, and maybe even come out on top?

Now I have experienced several important economic turns. Very early in life, I saw how devastating finances can be. next time it was better. I’ve been keeping an eye on what’s next ever since and have built my finances and investment portfolio to not only survive another downturn but to thrive through it.

first, we need to identify the risks, then money movements can strengthen your position, and then make the right adjustments quickly.

the probability of a new recession

Another recession is almost inevitable. it is simply the way the world, the economy and finances work. It’s not about if, but when.

Looking at historical cycles and patterns, the market typically changes predictably every seven to 14 years or so. Of course, this can vary and be influenced by various other crises, monetary policy, stimulus, and artificial market manipulation. Sadly, many investors don’t have a plan, though a turnaround in the economy can be a great thing if you’re positioned to benefit from it.

recession versus stagflation

When there is runaway inflation, the Fed’s response is to start raising interest rates. expectations are that several substantial increases should cool the economy, although, to quell inflation, they would normally have to raise rates to match inflation. Historically, rates have topped 14% to 20% at times like these.

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When the economy stagnates but inflation doesn’t stop, we can slip into a much-dreaded period of stagflation, meaning that even without capital losses in the stock market, you’re losing without the right investments. The purchasing power of your savings, investments, and retirement accounts is declining every day.

If your money depreciates 30% a year due to inflation, your $1 million in savings is worth just $700,000 this year. next year it will be only $490,000.

the end result

We all need to be prepared for times like these. we all need protection against losses and investments that can benefit from inflation. by all means, when it’s raining gold, pull out a really big bucket. sadly, most are unaware of the holes that appear in that bucket and how quickly it can all flow out when the market turns against them.

diversification in the stock market

The real danger is that most investors are not well diversified. many believe they are because they have invested in many different stocks or funds on the advice of their broker or 401(k) plan manager. Unfortunately, this is not real diversification.

It is essential to observe the correlation between the performance of your different investments. While there may be a handful of exceptions, when the stock market crashes, pretty much everything crashes. not only to a point of correction, but also thanks to panic buying, it notoriously overcorrects. That’s why so many woke up in 2008 to find they lost $70,000 or more overnight.

public actions are closely correlated. some will always believe in investing in them. The point is that you need a greater variety of investments in your portfolio. it just doesn’t matter if you have 10 publicly traded stocks or 110, you’re not sure.

Understanding correlation indices

The problem with publicly traded stocks is that their performance is closely related, meaning they move together. when they go up, they mostly move positively in the same direction. when they are going down, they all go down together. that’s a big financial problem and one that always seems to rear its head just when money is needed most.

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The key to building a recession-proof portfolio is having a mix of investments and assets that won’t suffer during these times. in the investment space, we refer to this in terms of correlation indices.

These ratios are measured on a scale of +1 to -1. a correlation index of +1 means that two assets move in perfect positive correlation with each other, like public stocks. a correlation ratio of -1 means they are in sync and negatively correlated. they are opposites. Like a scale, when one goes up, the other goes down. therefore, when its stock declines, this type of asset will rise in value.

A correlation of 0 means that there is no correlation between two assets. Just because one goes down doesn’t mean the other will go up or down at the same time.

true diversification

In my opinion, the ideal is to accumulate at least seven to ten types of investments and assets, each with different correlation relationships. however, if you’re just in the stock market, then getting five to seven types of diversified investments as quickly as possible could make all the difference in your financial future. That means at least six different types of investments and asset classes plus anything you own in the public stock market. look for investments with a low correlation to changes in your stock’s performance or investments that move in direct opposition to them.

how to diversify your portfolio

Savvy investors who have been through these cycles protect their wealth from (and benefit from) these economic changes by investing much more in alternative assets than the public stock market, bonds, and cash. they choose investments with much less correlation, such as: private equity investments, real estate, notes and debt investments, cryptocurrencies, and precious metals.


Sooner or later, another recession is inevitable. One of the best solutions to prepare is to better diversify your portfolio, so consider adding some alternative investment types to your own investments.

The information provided here is not financial or investment advice. you should consult a licensed professional for advice on your specific situation.

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