Investors are as worried about recession as the Federal Reserve is about inflation, and at the first signs of a slowdown, stock pickers and regular investors start thinking about how to protect their portfolio from the incipient slowdown. While a recession doesn't necessarily mean all sectors perform poorly, it is a challenging time to hold stocks. However, if you know how to invest during rough patches, you can survive, if not thrive, during a recession.
Step 1 - Pick stocks that have huge double- or triple-digit growth. In spite of other drawbacks a company may have, if you invest in stocks with massive growth, a slowdown will not affect the growth of the stock very much. Make sure this growth, however, is not at the expense of other factors.
Step 2 - Look for stocks that are undervalued based on the company's assets and cash flows. Find good stocks that are disliked during a recession because of external factors and not because of the viability of the company.
Step 3 - Opt for companies that have economic independence and are not vulnerable to the fluctuations of the U.S. economy. Good examples are debt collection agencies and companies that have a good part of their revenues coming from overseas.
Step 4 - Select defensive stocks that focus on drugs or food. These goods are necessary even in down times, and people don't stop eating just because there is a recession.
Step 5 - Protect yourself with dividend stocks. Companies that offer a high dividend yield will be like shelter in a storm and will give you income even in difficult times.
Tips & Warnings
- Know that even in a recession, there is always a part of the economy that is working. Try to find the sector that is healthy in downtimes.