Avoiding these 3 mistakes can make your portfolio recession-proof

Updated: Sep 19, 2020

Businessman trying to stay zen while people panic around him

Let’s face it, from main-street to Wall-street, everyone is hurting. Equities just posted their worst quarter in a decade, and jobless claims skyrocketed to more than 7 million in the last two weeks. To see why things will get worse before they get better, it's important to understand the cost a lengthy shutdown imposes on the economy. A recent JPM study finds that half of all small businesses - companies employing fewer than 500 people - have cash reserves of 27 days at most. Three-quarters can hold out for up to 2 months. Small businesses employ about 48% of the entire country's workforce: 60 million workers. It takes a moment to take this all in. Faced with the possibility of the “Greater Depression,” investors have to think carefully about how to manage their portfolios through it. There’s an old expression that, even though history doesn’t repeat itself, it often rhymes. Learning from past recessions, here are three things to avoid.

Avoid Panic Selling

Unless you need the money now, it’s too late to sell. Individual investors have an extremely valuable luxury of patience. This is in stark contrast to institutions which are forced to sell aggressively because they can’t afford near term losses if they want to attract new funds. Individual investors don’t need to worry about that. While investors are quite good at picking winners, they’re much less skilled at timing their sales. An interesting paper published early last year shows that investors underperform even entirely random selling by a solid margin. In large part, this is because sales often happen in times of panic, much like now.

Avoid Growth-Levered Sectors

If you are going to make changes to your portfolio, shift between sectors, not between asset classes Careful analysis of past recessions shows that Technology, Industrials, and Consumer Discretionary sectors are consistently among the worst-performing parts of the equity market through the recession. In contrast, Health Care and Consumer staples hold up the best. Importantly, if you make these changes you need to actively manage your portfolio because the performance is exactly reversed once the economy is on the road to recovery.

Avoid Leverage

The market is awash with leveraged ETFs that offer a quick way to supercharge your returns. The issue with putting money in them ahead of a recession is that during periods of turbulence they could actually go bust! Even when your view is ultimately correct, you may be forced to exit the position. Similarly, if you’re trading on leverage, margin calls can cut short your runway. You’ll watch from the sidelines, nursing your losses as the asset recovers. It can be nerve-wracking and confusing, but keeping these three things in mind can help you weather the storm and come out the other side unharmed.