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How to recession-proof your investment portfolio

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With a recession almost inevitable, now is a good time to revisit your investments...

Fears are building that Britain is crashing towards its deepest recession since the Great Depression.

The UK economy could shrink by as much as 13% this year due to the government’s coronavirus shutdown, the Office for Budget Responsibility has warned, while a Bank of England policymaker last week said the UK could be heading for its worst economic shock “in the past century, or possibly several centuries.”

It’s, therefore, a good idea to get your investment portfolio recession-ready.

“While no-one should make drastic moves with their investments, a looming recession is a good time to revisit the basics, remind yourself why you’re investing and work out areas where your portfolio is lacking,” says Laura Suter, personal finance analyst at investment platform AJ Bell.

Here, she gives her top tips to get your portfolio ready for the inevitable recession.

Spread your eggs around

Diversify your holdings. This is arguably the single most important message for investors.

Suter says the recent falls in equity markets should “have been a wake-call” for many investors that they had too much risk in their portfolio – and too many of their assets in the stock markets.

She notes that just 340 funds out of more than 4,000 have delivered a positive return so far this year, and a large chunk of the ones above water are bond funds, which “highlights the importance of having exposure to these assets in your portfolio”.

“Look at how much you have in each sector, asset class and country and assess whether you need to rebalance,” Suter says.

Check your holdings don’t overlap

Make sure you don’t have too much money in a handful of companies. This is trickier if you invest in funds and investment trusts, as you need to make sure you don’t have too much overlap in your holdings.

Suter points to the example of oil companies: “Anyone with exposure to oil companies has been hit by the oil price war and subsequent plummeting oil price. This should be ok if you only have a small portion of your portfolio exposed to these companies, but if you discover that lots of your fund managers own these same stocks you’ll see a much bigger impact on your portfolio.”

Monthly fund factsheets only usually have the top 10 holdings on them, but you can still check there isn’t too much crossover in your funds’ biggest positions.

Income investors should prepare for the drought

Anyone investing for income – whether directly in stocks or through funds – should prepare for a hit as lots of companies have cut or delayed their dividends in 2020.

Suter says: “Investors don’t have many places to turn, as there aren’t obvious untapped sources of income elsewhere, so they may need to take more capital out of their portfolio if they’re reliant on the income.”

Another option is putting some money in investment trusts as they are able to build up reserves to use to pay out future dividends to investors.

“You’ll need to check the reserve level, or ‘dividend cover’ that these trusts have to see how much they have in the pot available to supplement current income,” she says.

Remember why you’re investing

Markets are likely to be rocky for a long time, which is fine if you won’t need access to your cash for a while.

If you’ll need your money in the next couple of years, however, it might be worth gradually de-risking your portfolio.

Suter says: “No-one wants to be a forced seller just after markets have fallen, but likewise no-one wants to have to delay big events like retirement or a house purchase because their investment pot has taken a big hit.”

Do you have enough cash?

It’s a good idea to have an emergency pot of cash available at the moment, which could mean selling some of your investments.

You then need to think about the cash level you’re comfortable with in your portfolio.

“Do you want to keep some cash on the side to take advantage of market falls, do you want to de-risk your portfolio by having a bit more cash than usual, or do you think markets will rebound and you want to reduce your cash to put it into market? There’s no right answer, but just make sure you’re not hoarding cash that’s earning no interest for no reason,” says Suter.

Invest in ‘recession-proof’ funds

Lastly, you could consider putting some money into funds whose investment styles should do well in a downturn.

Suter suggests the Personal Assets investment trust, which invests in a range of assets including high-quality companies, short-dated government bonds, cash and gold.

Another option is Janus Henderson UK Absolute Return, which has held up well in recent market volatility and protected against losses – since the start of the year it has lost 0.9% when markets have fallen by much more.

Finally, Evenlode Global Income, which invests in around 40 large companies around the globe, offering some diversification between different countries and markets.

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