How To Build A Recession-Proof Portfolio

Brandon R. Amaral, CFP®, EA
Brandon R. Amaral, CFP®, EA

Founder & Financial Planner, Amaral Financial Planning

Have you heard the secret to beating the stock market with little to no risk for the cheapest cost possible? If you haven’t, you could hear it from:

  • Your aunt’s friend, whose advisor has underperformed in the market for the past 20 years, but this year is going to be different
  • That dad from your kid’s little league team, who has a great “new” life insurance product he wants to sell you
  • Your friend, who learned about investing techniques “for the rich” from a TikTok trend or Reddit thread

The truth is – there is no crystal ball when it comes to investing. There are no shortcuts or secrets.

Whether you’re a recent grad looking to start investing or the breadwinner of your family filled with anxiety amid rampant layoffs, we all want to make the right moves and avoid costly mistakes.

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Here is how to build a recession-proof portfolio:

Protect your basic needs

President John F. Kennedy once said that “the best time to repair the roof is when the sun is shining”. How can you apply this philosophy to money?

When things are going well and your job feels stable, you may start taking more risks. This can include spending more than you had planned (if you did at all), dipping into your savings accounts, or relying on credit cards to fund your lifestyle. But what happens when you wake up to that company-wide email that you were laid off?

It is essential that you have a strong emergency fund as a first step to investing. To get started, you should review your current spending to understand how much you need to pay all your bills in a given month. This includes rent/ mortgage, utilities, food, transportation, daycare, and health expenses. Once you know your monthly expenses, you should decide how many months of reserves you need to keep. For some, this could be 3 – 6 months, while others might need 9 – 12 months. Whatever the amount you decide, it should be kept somewhere liquid and safe, such as a high-yield savings account.

Create SMART goals

It’s hard to save for a goal when you don’t know exactly what you’re saving for. You might say that you “need a new car” or that you’d like to “retire someday”, but it can be difficult to create a plan without more details.

When creating goals, you want to make sure that they are SMART:

Specific (what exactly do you want?)

Measurable (how much money do you need?)

Achievable (is it realistic?)

Relevant (does this align with your other goals?)

Time-bound (when do you want this by?)

So instead of saying that you “need a new car”, you should say that you want an SUV with good gas mileage with room for your growing family, which costs between $30,000 – $40,000 before your daughter turns two. By defining what you want, why you want it, when you want it, and how much you’ll need for it, it increases your likelihood of reaching the goal.

Fill your buckets accordingly

Investing is risky. According to a study by LPL Financial, it takes an average of 19 months for stocks to recover from their market losses. Recently, the market has recovered even quicker. But what does this tell us?

If you plan to use money in the next 12 – 18 months, it’s safer to keep those out of the market. Products such as a high-yield savings account, CD, or I-Bond may provide you the protection you are looking for, while also continuing to earn interest.

If you plan to use money in the next 2 – 5 years, you may be able to withstand the normal ups and downs of the stock market. Conservative portfolio allocations, such as 40% stocks/ 60% bonds may provide you with the stability you are looking for, while also maintaining exposure to the stock market.

If you plan to use money in the next 5 + years, your time horizon may be long enough to weather any future recessions or depressions. Moderate to aggressive portfolio allocations, such as 60% stocks/ 40% bonds or even 90% stocks/ 10% bonds may provide you with the long-term growth you need to achieve your goals.

Don’t panic

Sounds simple? That’s because it kind of is:

  • Protect money needed for your emergency fund and short-term goals
  • Determine what you are saving for, why you are doing it, how much you need, and when you need it by
  • Organize your savings into different buckets based on your time horizons
  • Stay the course through the ups and downs, media coverage, and investment advice you get from your company’s slack channel

Mistakes tend to be made when you make changes with no clear plan ahead. Whether or not a recession will happen in two days or two years, it’s out of your control. All you can do is position yourself in a way that will not negatively impact your livelihood or goals.

Taking these steps can ease your anxiety around money and help achieve your goals. If you would like to work with a financial planner to walk you through your options, I would love to help you!

To learn more about becoming a client, schedule a complimentary meeting now!

Disclaimer: This blog is for informational purposes only, and should not be considered advice or recommendations. All opinions expressed herein are solely those of Amaral Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. You should consult your financial advisor, tax professional or legal counsel prior to implementation.