The "R" word has been mentioned on the street for some time now, but recently the chatter has been growing louder. The housing market has collapsed and began a domino-effect across other areas of the economy. The credit markets in particular were hit hard when consumers began defaulting on their other non-mortgage loans while lower interest rates have caused high inflation. All of these are tell-tale signs of a recession to come - so what can you do about it?
A recession itself is simply defined as two consecutive quarters of negative growth in the country's gross domestic product (GDP). Simply put, this means that the U.S. economy as a whole is losing money rather than making money. This often occurs when consumers stop spending as much money or inflation makes money worth less. Currently, the U.S. is suffering from both of these problems at the same time and both of them at near-record levels. Luckily, there are two big ways to protect your stock portfolio from the effects of a recession.
Buy International
The most obvious solution is to invest in international companies that aren't affected by the U.S. economy. Many of these companies have what are called American Depository Receipts (ADRs), which enable U.S. investors to buy and sell foreign stocks. There are also many U.S. companies that do the majority of their business outside of the United States and aren't as affected a recession.
Most investors find foreign Exchange Traded Funds (ETFs) to be the easiest way to invest outside of the United States. The largest provider of such ETFs is iShares, which offers international funds from many different countries. Each of these ETFs contains a basket of stocks based in the respective country. Even better, these ETFs can be purchased just like normal stocks through your brokerage account and can be bought and sold at any time!
Buy the Necessities
The second big way to protect your stock portfolio from a recession is to invest in what are called consumer staples. These are products that consumers cannot live without, such as food and clothes. Companies that provide these products may be forced to cut prices a bit, but they are far less hurt by a recession than companies making luxury goods. Finally, they also tend to reward investors with high dividends that rise despite any downside. This effectively pays you to wait until the economy makes a turn towards the upside.
Consumer staples companies include the likes of Altria Group (MO), Kimberly Clark (KMB) and Procter & Gamble (PG) among others. Many also group some energy companies into the mix since consumers can rarely live without gas or heat in today's world. Moreover, record oil prices and the promise of so-called peak oil is further reason to look into these other options. All in all, these companies will see some downside with the economy, but not nearly as bad as other luxury sectors.
Other Choices
The two ideas mentioned above are the most common ways to protect your portfolio against the effects of a recession. Others find it beneficial to keep their money in cash or even purchase foreign currencies to hedge against inflation. Still more prefer to bottom-fish and start buying industries that tend to recover first - like retailers. Either way, there are many ways that you can save and even make money when the dreaded "R" word hits!
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