Kavan Choksi Sheds Light on a Few Tips for Weathering a Recession

Recessions are an inevitable part of the business cycle. They are typically defined a contraction of economic activity that lasts for at least six months. As Kavan Choksi says, as recessions are a relatively regular part of the economic cycle, it is imperative to have a plan for when they occur. While investors may not always be able to make their portfolio recession-proof, they can certainly take steps to make it recession-resistant.

Kavan Choksi highlights a few tips for weathering a recession

Recessions typically coincide with bear markets or market declines of 20% or more. The bear markets often come first, with investors starting to anticipate an economic slowdown. Even though an average recession tends to last for just eleven months or so, it usually takes the market much more time to bounce back to its pre-bear peak. Therefore, shoring up cash reserves is the first thing one must do to make their portfolio more recession-resistant. Otherwise, may have to sell off stocks during a market decline and lock in losses.

Non-retirees should set aside about three to six months of living expenses in an account that is relatively liquid and safe. It can be a money market fund, money market savings account, interest-bearing checking account or even a short-term CD (certificate of deposit). The cash reserves of retirees have to be much larger, and cover about two to four years’ worth of expenses. After all, many retirees cannot afford to wait for their investments to rebound.

Investing is a marathon and not a sprint. Hence, investors should not bail on the market as things get tough in a recession. Moreover, historically, some of the best days in the market have occurred right on the heels of some of the worst. As long as an investor has enough funds and time on their hands, they should stay on course to potentially benefit from the eventual recovery. However, this does not mean that they cannot sell off a few investments and purchase others as a part of the regular portfolio maintenance.

As Kavan Choksi says, when the market is on a decline, it is natural to simply wait till it recovers to put in more money. But if an investor can afford it, they should do the opposite, while remembering the following:

• Do not use emergency funds for new investments.
• Do not hoard cash in hopes of landing a bargain. The sooner one’s money is in the market, the sooner would it benefit from the effects of compounding.
• Do not use the funds that one would require soon, as the average steep downturn in the market can last for multiple years.

In addition to the prospect of buying shares at a discount, a recession also provides investors with a great opportunity to make strategic adjustments to their portfolio. They must make tactical tweaks to the portfolio, while not deviating from the target asset allocation by more than five percentage points. Investors should especially prioritize buying high-quality stocks in a recession. Stocks of companies that have a strong cash flow, low volatility and positive earnings generally tend to outperform when recessions hit.