What To Do During A Recession: How To Safeguard Your Investment Portfolio

Yen Joon

Yen Joon

Last updated 30 July, 2022

Stocks are in a bear market, crypto is crashing, and inflation is at decades high. To make matters worse, all the talk about a looming recession may not have tamed your nerves about your finances too. In other words, these are worrying times for an investor.

As such, you might be thinking about what you can do about all this; do you need to shake up your investing strategy? Should you be buying the dip? What can you do to protect your investments?

Below are some considerations for you to consider to help you ride through a recession. 

Table of content:

What should you do during a recession?

With markets generally in the red, you may be looking to cash out on your investments and cut your losses before they slide any further.

But before you go into panic mode, remember that volatility is part and parcel of investing. In fact, legendary investors, Warren Buffet and Peter Lynch have talked about stomaching risks during uncertain periods to focus instead on your long-term investment goals. Understanding their mental models for decision-making and applying them to your investment can lead to less emotional investing

Here’s a table showing the stock market returns during recession years, and how it performed the following year:

Recession year Recession year returns (S&P 500) Following year returns (S&P 500)
1945 30.3% -11.9%
1949 10.3% 21.8%
1953 -6.6% 45%
1957 -14.3% 38.1%
1960 -3% 23.1%
1970 0.1% 10.8%
1974 -29.7% 31.5%
1980 25.8% -9.7%
1982 14.8% 17.3%
1990 -6.6% 26.3%
2001 -13% -23.4%
2008 -38.5% 23.5%
2020 16.3% 26.9%

In most cases, the S&P 500 rebounded the year after a recession, with the exception being in 1945, 1980, and 2001. For instance, during the COVID-19 recession from February 2020 to April 2020, the stock market fell by 1.4% but the S&P 500 closed out the year 16.1% higher. 

Likewise, during the 2008 financial crisis, the stock market fell by nearly 40% before rebounding by 23.5% the following year. 

The takeaway is that it’s hard to predict the market before, during, and after a recession. Most experts say that in general, the longer you hold out, the less likely you’re to lose money. Typically, you should be looking at a 20- to 30-year horizon. 

On the other hand, with stock prices falling, you may be looking to scoop up stocks at a bargain.

Instead of waiting for the market to fall so that you can buy the dip, Gregory Van, CEO of Endowus, advises against timing the market for short-term gains. A better way is to buy throughout the dip.  

“For example, if you have S$10,000 to invest, you can split that sum into four and invest S$2,500 every month over the next four months. No one knows where the markets will go in the next four months — we do know that there will still be a lot of uncertainty. But once there is more certainty, you are usually too late,” Gregory said. 

He added that during the COVID-19 market crash in 2020, most investors stood by the sidelines as the market fell by over 30%. However, in the six months that followed, the market rebounded 40% above pre-COVID levels. 

“Investors should stick to their long-term investment plans. It’s not ideal to change their core wealth plans unless there are fundamental changes in their lives.” 

What to invest in during a recession?

Aside from adopting a buy-and-hold strategy, you may also consider investing in defensive stocks

As the name suggests, a defensive stock helps to defend your portfolio against losses during times of uncertainty. These consist of well-established companies that offer goods and services that are always in demand, such as healthcare and consumer staples

Investors who want to protect their portfolios during a recession will typically lean toward defensive stocks. While they don’t offer huge growth potential, defensive stocks offer consistent dividends and stable earnings even during economic downturns. As such, they tend to outperform during a bear market.

Examples are Coca-Cola (KO), PepsiCo (PEP), Johnson & Johnson (JNJ), Procter & Gamble (PG), Moderna (MRNA), and Pfizer (PFE). These companies also tend to have a healthy balance sheet and steady business models.

Besides individual stocks, you can also invest in funds such as exchange-traded funds (ETFs) and index funds, which are often less risky than investing in an individual stock.

ETFs and index funds give you exposure to a basket of securities, such as stocks or bonds.  This allows you to invest in several companies in a particular sector instead of concentrating on one company. If one of the companies tanks in performance, the strong performance of other companies can help to offset the loss.

One safe bet is to invest in an ETF that tracks the S&P 500, such as the Vanguard S&P 500 ETF (VOO) or iShares Core S&P 500 UCITS ETF (CSPX). While it has been a turbulent time for the S&P 500 in recent months, it tends to perform well over time, averaging an annualised return of 10.5% since 1926. 

If you’re looking to invest in consumer staples ETFs, you can consider the Vanguard Consumer Staples ETF (VDC) and the Consumer Staples Select Sector SPDR Fund (XLP), while healthcare ETFs include the S&P 500 Health Care Index (SPXHC) and Health Care Select Sector SPDR Fund (XLV).

Aside from that, Gregory says that you can also invest in other low-risk investments such as government bonds, fixed annuities and dividend stocks. 

That said, those are just a guideline; when evaluating a stock or company, you should analyse the company’s financial reports to determine its debt, cash flows, growth prospect, and profitability. Aside from that, you can also look at other metrics such as a stock’s price–to-earnings (P/E) ratio to determine whether the stock is over or undervalued.

What to avoid during a recession?

Instead of pressing the panic (selling) button, Gregory says you should avoid getting swayed by headlines, hearsay or try to capitalise on short-term market movements. 

“Too often, we hear about people chasing returns and moving their money around from one sector to another. Most recently, we have seen people moving aggressively into commodities because they have done well recently and are expected to do well in a high-inflation environment and a prolonged war

“However, oil is now down over 20% over the last 45 days. With trillions of dollars changing hands every day as people buy and sell stocks, bonds, commodities and currencies, we have to remember that the market is a pricing machine and the prices of everything continuously change based on the future perception that people have. 

“As such, any investment trends or strategies that focus on capitalising on short-term market movements should be avoided. This also involves staying away from highly risky and volatile asset classes such as cryptocurrency and NFTs, especially if one is new to investing.” 

Should you keep more liquid cash during a recession?

With the threat of recession looming, companies will be looking to pull back on expenses to keep afloat. And that means reducing headcounts. 

As such, it’s important to shore up your emergency funds as a safety net to act as a buffer should you suffer from a pay cut or job loss. 

One avenue to keep your funds in a high-interest savings account. With local banks increasing the interest rate for their savings account in tandem with rising interest rates globally, this is a good opportunity to earn a higher interest.

The main caveat of savings accounts is that the base interest rate is low, so you’ll also need to fulfil certain criteria in order to earn higher interest, such as pairing it with a credit card or crediting your salary. 

In times of uncertainty, it becomes even more important to build your financial cushion. Gregory says: “if you think your income from your work salary is at risk, it makes sense to first cut back on expenses and build a larger liquid cash buffer such as an emergency fund that can pay off around six months of expenses. You can put this in a liquid and low-risk money market fund or a portfolio that allows you to earn some yield with no lock-ups on this money.”

Other options for keeping your emergency funds include a cash management account, an insurance savings plan, or government bonds such as the Singapore Savings Bond (SSB). These financial products offer high liquidity while providing low-risk and stable returns.

For example, Endowus Cash Smart offers a projected return of between 1.5% to 3%. What’s more, you can invest with your CPF savings and SRS money. 

Meanwhile, the SSB is also a good investment vehicle to park your emergency funds. The interest rate for the entire 10-year tenure of the bond is fixed, so you know your expected returns when the bond matures. This makes it suitable for those who are more risk-averse.

What's more, you can withdraw your money (principal + any interest earned) without any penalties. Interest rates for the SSB have also gone up in recent months, which makes it even more attractive.

Also read: The SSB vs CPF: Which One Has Better Returns?

That said, remember that like all investments, there’s a risk of a loss and there is no guarantee of returns. Before investing, consider your time horizon and risk appetite.

Read these next:

Here’s How to Build An Emergency Fund On A Tight Budget
Fast Cash Loan vs Emergency Fund: Which Is The Better Contingency Plan?
Fixed Deposits vs. Endowment Plans vs. Cash Management Accounts: Which Should You Choose?Endowus Review: Investing Your Cash, CPF And SRS Money At Low Fees
Best Places To Put Your Money During A Recession

In my past life, I was always broke because of a lack of financial literacy. Now, I publish a few posts every week* on personal finance to help you manage your money better. *I mean, I’ll try


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