Recession Proofing Your Investments

In our current economy the one thing that you see the most of is that more and more people are maxed out when it comes to borrowing against their homes equity. People have borrowed against the equity in their homes to make needed repairs or to even pay for vacations because of how low the interests rate were and how easy it was to borrow the money. But what most investors are worried about is how the housing market decline is going to affect the entire economy as a whole, including the stock market.

But no matter if the economy is facing a recession or a retreat if it is in some kind of decline that is going to bring investors new challenges in addition to new opportunities that they wouldn't normally get to have. So as an investor the one thing that you are going to want to know is that no matter what kind of an economy we are currently in you are going to want to have a well diversified portfolio. The reason for this is that the better diversified that your portfolio is the better it will be able to withstand anything that the economy has to throw at it. Not to mention that having a diversified portfolio will also help top cushion any unexpected market risks that you can't control.

Also keep in mind that if you plan on making any changes to your portfolio you want to make sure that any changes that you make in regards to the sluggish economy either this year or next should be well planned out and should be moderate not maniac. Because even though things look grim you never know if and when things will turn around. But there is no denying the fact that the US economic cycle is declining. So in the face of these declining times you want to stay away from fast growing small capitalization stocks, high-yield bonds, emerging markets, and other lower quality investments. Instead what you want to look for is defensive, high quality, dividend-paying large-cap US and international stocks. But you also want to look into short term bonds, bank certificates of deposit and cash as another form of investments.

Here are six things that you can do to make sure that your investment portfolio is considered recession proof.

Number one:
You want to try and buy quality stocks, but you also want to look for your bigger companies that offer this quality. One thing that you need to keep in mind is the old investing adage that says when earnings growth is abundant, the market prices it like water. But when growth is hardly there, it is priced like diamonds. Sow hat usually happens is that when the economy slows down many companies do not manage to meet the earnings growth that is expected of them by Wall Street. And the sad news is that investors that move stock prices are unforgiving of the companies that miss this mark. And in a bad economy smaller companies are more likely to be hit with the negative earnings, as well as companies that are in cyclical industries such as technology or luxury items. So what you want to do is avoid the uncertainty and choose companies that can provide you with predictable growth, which in turn leads to a higher quality of earnings. These are going to be your larger companies that are n solid industries and have been around for awhile so that they have a steady stream of cash to pay dividends and keep the business running. And while they can still lose value during an economic downturn they are not going to lose as much as the smaller companies.

Number two:
You can also invest in companies that provide consumer staples, this is also known as defense investing. Usually during a recession the top performing companies are going to be in the industries that have the most reliable source of profits. One of these industries is consumer staples. This covers companies that manufacture and sell food, beverages, tobacco, household products, and personal care items. The reason that these hold up so well in tough economic times is because of the fact that no matter what is going on in the economy people still need to buy these kinds of items. Not to mention that the larger companies that sell these staple items also tend to pay meaningful dividends in addition to steadily raising the dividends that they pay out. And by doing this these larger companies are enhancing their overall quality and appeal because when times are tough it is nice to be paid while you are waiting for the turmoil to stele.

Number three:
Another defense fund that you can invest in is healthcare; this includes both the healthcare sector and the pharmaceutical companies specifically. The reason that this is a great choice to invest in is because people are always going to need healthcare and medication to make themselves better. Not to mention the fact that these companies tend to have predictable earnings and revenue even when the economy is in a downslide. And because of this steady revenue these companies tend to stand out in the crowd. And in some cases the bigger companies like other larger companies in the stock market are going to be paying out substantial dividends to their shareholders, which is an attractant in itself.

Number four:
In our society everybody is interested in investing their money because it helps them with a large assortment of things, such as building retirement funds. But in our society more and more people have taken to relying on the stock market when it comes to investing their hard earned money, hardly anybody is using the old fashioned methods of investing which includes the certificate of deposit. In our unstable economy CD yields are actually better in the six to twelve month range than a bond would be according to the president of Envision Capital Management Inc. Not to mention that in our current economy cash is becoming king again because it is the only way that you can save your money and not lose it. In fact people are seeing some great yields when they invest their money into short term investments like CDs and money markets rather than in the unpredictable stock market. In fact according to the president of Envision Capital Management she recommends a Federal Home Loan Bank issue maturing in February that yields about 5.25% or if you are willing to venture out further you can get Fannie Mae paper that matures in 2011 and will yield about 5.4%.

Number five:
Since our market is so slow right now hardly anybody is investing in it because of the fact that they are worried that it is going to keep on slowing down. But the good news is if the economy slows down too much you can always invest in export-driven markets of Asia and Latin America. Or you can even invest in the commodity based economies of Australia and Canada. So what you want to do is invest in other countries that are not that close to the US economy because no matter what our economy is doing their economy is going to be doing fine unless they themselves are in a recession. If you have been paying attention to the economic news you are aware of the fact that Europe is going through their own financial crisis so you might want to be careful if you plan on investing overseas to help offset the US economy decline. But if you do invest in other countries keep in mind that you still want to make sure that your portfolio is diversified so that you are not taking a huge risk.

Number six:
Invest in Treasury Inflation Protected Securities, also known as TIPS. These are a great type of investment that you can use to help protect your portfolio against any type of decline. These investments pay interest every six months and they also return the principal once the security matures, just like other Treasuries. But the biggest difference is that the coupon payments and the underlying principal are automatically increased to compensate for inflation as it is measured by the consumer price index. It is this difference that makes these securities a winning investment because they are based in the world's safest investment, the US Treasury but they are also hedged against inflation which makes the real rate of return guaranteed.

Just keep in mind that no matter what route you take you are going to want to ensure that your portfolio is diversified so that you can realize the maximum rate of return on your investments. If you put all of your investments into one or two things you are going to be at a higher risk of losing everything that you have invested. Something else to look out for is if you plan on investing in these defense funds you are going to want to get in while the prices are still low, this can also help you to capitalize on your return.