Strengthening Your Portfolio: How To Prepare For a Recession

Published On: August 21, 2023Categories: Insights

In 2022, people’s attention shifted from concerns about when the pandemic would end to worries about the predicted recession in 2023. Now, more than halfway through the year, Canada has managed to avoid a recession thus far. However, the future still holds uncertainty.

This uncertainty is causing individuals to consider how an economic downturn could impact their finances and the importance of preparing for a recession.

A recession represents a period of significant economic decline characterized by:

  • Decreased national production and spending,
  • Heightened financial market volatility, and
  • Overall decline in the gross domestic product (GDP).

Not only does a recession see a decline in economic growth, but it can also lead to a rise in unemployment due to cost-cutting measures implemented by businesses.

With three interest rate hikes this year to combat inflation, the country’s risk of being pushed into a recession remains a strong possibility. In fact, over the last 60 years, the central bank has managed a 5.7% reduction in the inflation rate in three separate instances, each of which was followed by a recession.

What does this mean for my investments?

As Canadians proceed cautiously, the reality is that times are uncertain with many variables at play. Tailoring your investment strategy to your individual goals, risk tolerance, and time horizon while considering market trends and economic conditions is important.

When should I be preparing my investments for a recession?

The saying “closing the barn door after the horse has bolted” is a critical analogy when preparing one’s investments for uncertain times. Waiting until the economy starts trending towards a recession may be too late to protect your investments.

The market operates on the principle of anticipating future events, with market participants incorporating these events into their actions well ahead of time. When an investor foresees a recession in the coming fiscal year, it suggests that the market might have already begun making adjustments in response to this prediction. To bolster the resilience of a portfolio against potential market instability, it is advisable to take proactive measures by implementing a defensive strategy in preparation for the anticipated economic downturn.

What should I invest in to recession-proof my portfolio?

Are your investments exposed to market volatility? What potential losses could you face should a recession hit?

When assessing your portfolio, individuals should aim to safeguard their financial assets from the inevitable economic downturn’s impact. Portfolio diversification is a forward-thinking approach to protect investments by providing a cushion for volatile swings in the market.

Investing in a mix of asset classes that tend to retain value is a proactive way to balance risk and keep investments performing well. Allocations could include cash or cash equivalents, large-cap stocks focused on healthcare and utilities, as well as necessities, like food and shelter.

Why should I invest in necessities?

When bad economic times hit and financial strain impacts businesses and individuals, the first area people cut back on tends to be discretionary spending on non-essentials. Restaurant meals, daily coffees, movies, and vacations are likely to get the axe from household budgets in an effort to save. Industries such as retail, restaurants, leisure, and hospitality could be particularly vulnerable when businesses seek to streamline their financial performance, while individuals tighten their belts.

On the other hand, people are unlikely to cut back on life’s core essentials, like food and shelter. Recession or not, people still need to eat and have a roof over their heads, which are areas people will continue to prioritize in their budgets.

When evaluating your investment portfolio in anticipation of a recession, investors have the option to reallocate their investments towards sectors that cater to essential human needs, commonly referred to as necessities. This strategic approach allows investors to take advantage of the stability inherent in asset classes and industries that are less vulnerable to fluctuations brought about by recessions. By allocating assets to essential sectors, investors can potentially mitigate the adverse impacts of a recession on their financial well-being.

Why should I invest in private real estate?

Investing in private real estate can be an optimal solution to recession-proof your investment portfolio. As we’ve all seen and experienced, the housing demand and supply imbalance has contributed to home affordability issues, putting upward pressure on the rental market. As interest rates increase, prospective home buyers are waiting longer to buy or choosing not to buy at all, creating greater demand for rentals. This demand is forecasted to remain strong, even during a recession.

Why choosing the right company is important

Deciding who to partner with is crucial for your investments. It’s more complex than choosing a defensive sector. Investors should also assess the quality of the investment itself. Investing in a private real estate investment trust (REIT) is one way to possibly play defence for your portfolio and protect your financial future.

Equiton’s Apartment Fund can provide a reliable income stream and stability, even during a recession. The Fund’s enduring performance is exemplified by its recent milestone of 87 consecutive months of positive returns, proving the viability and profitability of this essential asset class.

Contact us today to learn more about how our private real estate investment solutions can help you build a recession-proof portfolio.