Coronavirus: how to recession-proof your investment portfolio

What should you do to get your investment portfolio in fighting shape for the volatile times ahead?

It’s not just individuals who are seeing their finances take a bit of a wallop as a result of the Coronavirus pandemic ‒ the nation’s bank balance is also looking a little dicey.

The Office for Budget Responsibility has warned that the UK’s economy could shrink by as much as 35% in the second quarter of the year, while there are concerns that even once lockdown starts being lifted progress will be slow. 

As a result, not only does a sharp recession look inevitable, it’s also unlikely to be one that passes swiftly.

So how can you protect your money?

Don't panic

I made the mistake of looking at my SIPP shortly after the pandemic really started hitting the financial markets, and it was difficult to do anything but laugh at the sea of red.

While it can be tempting to act quickly in a bid to stem the bleeding, when it comes to getting your investments in the right sort of shape for the further troubles ahead, it pays to take a calmer approach (as many loveMONEY readers can attest).

The team at investment platform AJ Bell have outlined a host of steps you can take to make sure your cash is well equipped to ride the recession waves and leave you in better shape once things start to pick up.

Get more baskets

All investors know that having all of your eggs in a single basket is a recipe for disaster.

And as Laura Suter from AJ Bell points out, the difficulties seen in the equity markets of late should have served as a “wake-up call” for investors that they may have had too many of their assets in the stock market.

She noted that while just 340 out of 4,000 funds have managed a positive return this year, a significant number of them are bond funds, highlighting how important it is to have some bond exposure in your portfolio.

So take this opportunity to review how much cash you have in each sector, asset class and country and calculate whether it could do with some rebalancing.

Mind your crossovers

It’s also important to check you don’t have too much cash tied up in just a few companies. It’s very easy for this to happen if you are investing in funds as there will inevitably be some overlap in their holdings.

But this can be costly if the firms that they overlap on hit troubles. 

Of course, the trouble is that checking precisely what is contained within your fund is not always as simply as it should be.

For example, monthly fund factsheets typically only cover the fund’s ten largest holdings, while its annual reports are likely to be out of date since they are only published once per year.

As such, you might want to focus your efforts on ensuring there isn’t too much crossover in your funds’ biggest positions.

What about income?

If you’re investing for income then 2020 is obviously looking like a rough year, with a host of businesses cutting or cancelling their dividend payments.

So what are your options here? One is to take some capital out of your portfolio. However, an alternative worth considering is to put your money into investment trusts as they are allowed to build up reserves which they can then use to pay out future dividends.

As Suter points out: “You’ll need to check the reserve level, or ‘dividend cover’ that these trusts have to see how much they have in the pot available to supplement current income.”

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Why am I investing?

Investing is a long-term business, particularly when things get rocky.

So take the time to work out when you’re likely to need to access your funds.

If it’s in the next couple of years, whether because you’re nearing retirement or because you want to use that money to buy a house for example, then it’s a good idea to start ‘de-risking’ your portfolio.

That means moving away from investments that are more likely to be volatile, and into assets that are more stable.

How much cash should I have?

Plenty of us are having to make do with less at the moment, so it may be tempting to sell off some of your investments in order to boost your cash savings.

But you also need to consider what cash level you’re comfortable with in your portfolio.

Do you want to have some cash to hand at all times so that you can step in and take advantage of market falls? Do you want to put your cash into those falling stocks so that you’re well-positioned if and when things pick up?

Or do you want to de-risk to the extreme by boosting your cash levels?

It ultimately comes down to how you feel about the risk and how confident you are about the markets turning around in the weeks and months to come.

Built for difficult times

A final option is to direct your money at funds ‒ and fund managers ‒ whose investment styles may mean they perform well during the difficult times to come.

Suter gives the example of the Personal Assets investment trust, which is positioned defensively with around 20% of its portfolio in cash, a third in index-linked bonds and 9% in gold.

While it has performed better than rival trusts, it has still lost 3.3% in the first three months of the year.

There will be other funds which are also set up specifically to ride out tough times which are worth investigating.