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Home > Stocks & Markets


HOW TO INVEST BEFORE A RECESSION AND PROTECT YOUR PORTFOLIO

Many experts have warned of a recession in 2022. Here's how you can invest
before a recession and protect your portfolio. Preparation is key for investors.

By Mohit Oberoi, CFA

Apr. 21 2022, Published 9:00 a.m. ET


Source: Getty

The U.S. economy staged a V-shaped recovery in 2021 after the slump in 2020. The
economy was expected to slow down in 2022 but Russia invading Ukraine has
sparked fears of a recession in 2022.



Many experts have warned of a recession in 2022. The U.S. economy went into a
recession in 2020 after the 11-year economic expansion, which was the longest in
history. Here's how to invest before a recession.




SOME INDICATORS POINT TO A RECESSION.

Some of the indicators have been giving a recession warning. For example, Paul
Hodges, the founder of New Normal Consulting, thinks that falling petrochemical
prices signal looming inflation. The U.S. housing market has also slowed down.
The yield curve inversion is one of the most credible recession indicators.

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Source: Getty

Some of the brokerages also see a recession on the horizon. Goldman Sachs thinks
that there's a 35 percent probability of a recession over the next two years.
John Mauldin, who correctly predicted the 2000 and 2008 crashes, is even bearish
and expects a recession in 2022. In the April BofA global fund manager survey,
26 percent of the fund managers said that a recession is the biggest tail risk
for markets.



> BofA's April FMS: Global Growth Optimism at All-time Lows; Fed 'Put' Seen at
> 3637, Top Strategist Says THE Bottom Yet to Come
> 
> Investors also named 4 key tail risks at the moment: 1) recession, 2) Hawkish
> central banks, 3) Inflation, and 4) Russia/Ukraine war.
> 
> — Kaushik (@BigBullCap) April 12, 2022

> BofA's April FMS: Global Growth Optimism at All-time Lows; Fed 'Put' Seen at
> 3637, Top Strategist Says THE Bottom Yet to Come
> 
> Investors also named 4 key tail risks at the moment: 1) recession, 2) Hawkish
> central banks, 3) Inflation, and 4) Russia/Ukraine war.
> 
> — Kaushik (@BigBullCap) April 12, 2022

San Francisco Fed President Mary Daly said that while she doesn't think a
recession is imminent, it's a possibility. Fannie Mae also sees a recession in
the back half of 2023 and expects the U.S. GDP to contract 0.1 percent in the
year.

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WHY IS EVERYONE WORRIED ABOUT A RECESSION?

Several factors are fueling recession fears. First, given the multi-decade high
inflation, consumer spending on discretionary items is expected to fall. To make
things worse, rapidly rising mortgage rates will lower the disposable money in
households. The Russia-Ukraine war is also adding to uncertainty in the markets.

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A recession isn't imminent. Morgan Stanley doesn't think that the U.S. economy
is heading for a recession. However, given the rising fears, it might be prudent
to position your portfolio for a possible slowdown in the U.S. economy.




HERE'S HOW TO INVEST BEFORE A RECESSION.

First, you should remain calm. A recession is as much a part of the economic
cycle as cyclical booms. Amid rising interest rates and slowing economic growth,
it would be prudent to look at your asset allocation.

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Source: Unsplash

Given the expected recession, you might want to somewhat trim your exposure to
stocks. Within stocks, you can shift towards value stocks. In the tech space,
investors might be better off in mature and established names like Alphabet and
Amazon than loss-making tech companies.

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If you require any funds from your portfolio over the next five years, ideally
it shouldn't be in stocks but in low-risk instruments. Given the rising interest
rates, floating rate bonds can be a good avenue to park funds with a horizon of
above one year. Also, make sure that you have some cash savings equivalent to
six months of expenses since a recession invariably leads to job losses.

Looking at the inflationary environment, you can make some allocation towards I
bonds. Their yields are tied up to the CPI inflation and investors can expect
good returns at least over the next year.


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INVESTORS SHOULD CONSIDER AN INCREASED ALLOCATION TO GOLD.

Amid the economic and geopolitical turmoil, you can increase your allocation to
gold. Gold can outperform in a recessionary environment and barring rising
interest rates most other factors are supportive of gold prices.


INVESTORS SHOULD AVOID CERTAIN INVESTMENTS AHEAD OF A RECESSION.

It's always better to avoid speculative and penny stocks before a recession.
These stocks have fallen and more pain could be ahead if we head towards a
recession.

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