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How to build a recession-proof portfolio

Any mismatch with the need, goal or timeline of your investment is a primary lacunae to building a portfolio

October 01, 2019 / 11:28 AM IST

Santosh Joseph

Recession is a business cycle slowdown with weak economic activity for at least six months. It generally occurs when there is a widespread drop in consumption and is typically associated with a gloomy market sentiment over an extended period. Spending cuts, drop in assets prices, overall roll back in many expansion activities are some tell-tale signs of recession.

For most of us, recession is not something new. The global financial crisis of 2008 is still fresh in the memory for many of us. However, what’s interesting to note is that the economy and markets have recovered globally. All asset classes have bounced back and made life-time highs with enormous wealth being created for investors.

Recessions, though not welcome, are periods of great learning opportunities. Even the harshest of recessions will eventually pass by and lead to higher economic activity, with resilience built-in to mitigate probable future shocks.

Recession is imminent during one's lifetime. Regular investors would have built up significant assets in the years leading up to the recession. An impending recession typically presents two options: retain your investment, but risk significant erosion of the asset value in the short term, or make large withdrawals to move your assets out of the market. But are those the only options for investors? Is it possible to instead build a portfolio that is recession-proof and hence obviate the need for such panic moves?  It definitely is if you get a few fundamental aspects right.

Here’s how you can build a recession-proof portfolio

Desired Outcome

Be clear about the needs and goals of your investment and the timelines for them. This is easier said than done. Even before you start investing, you must, with near clinical precision, have clarity about the needs and goals associated with your investment. Attach clearly differentiated timelines for withdrawal of the monies. Any mismatch with the need, goal or timeline of your investment is a primary lacunae to building a portfolio and more so one that is recession proof.

 Asset Allocation

Diversify your investments and have the right asset allocation. Diversification is essential to ensure the risk from overexposure to one asset class is minimized. Make sure you do not put all your eggs in one basket. Saving or investing all your money in one asset is not prudent.  We have seen it in the past and in recent times that all asset prices don’t deliver consistently or predictably. There will be fluctuations over time. But, through a cycle, the returns will even out. In 2019, equites have had a rough patch, whereas gold has had a great run. So, it’s imperative to build a portfolio with diverse assets, yet with a concise and precise measure to the portfolio objective.

Says American economist Harry Markowitz, “There’s no such thing as the perfect investment, but crafting a blueprint that offers high returns and relatively low risk is a priority for most investors”. This approach led to the Modern portfolio theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk. It emphasizes that risk is an inherent part of higher reward. According to the theory, it's possible to construct an "efficient frontier" of optimal portfolios offering the maximum possible expected return for a given level of risk. This research and study by economist Harry Markowitz transformed the landscape of portfolio management—a paper earned him the Nobel Prize in Economics nearly four decades later and is still relevant today.


Even well-thought-out investment plans and portfolios need sufficient time to play out and deliver the expected outcome and objective. All sound investments require ample holding time to deliver optimal returns. Patience is the new intelligence. Time is your greatest strategy and tactic. Great results are achieved with long term, disciplined and patient investing. One may miss out on the opportunity to make big money due to lack of patience. Therefore, one can’t stress the fact that being patient is of great importance to ensure successful investing outcomes.

Tough Portfolios last

It takes a strong resolve to keep faith in your investments and let them appreciate and grow over time to yield maximum gains. Remember, fluctuations are part and parcel of your investment cycle. Sometimes, the best theories, analysis and good-quality portfolios do take a beating in the very short term, since we live in an extremely connected world. News flows can change outlook and situations can change drastically on a real-time basis.

(The writer is Founder and Managing Partner, Germinate Wealth Solutions LLP)

first published: Oct 1, 2019 08:52 am