7 Top Tips for Investors Scared of a Recession

March 10, 2023

The stock market has been on a down trend, amid concerns of more aggressive US Federal Reserve rate hikes. Eventually, that could cause a recession in the US.

While no one has a crystal ball on whether an impending recession will materialise, investors need to take precautions and build a resilient portfolio to withstand an economic downcycle.

During a recession, the stock market tends to decline, and investors may become risk-averse.

Here are seven top tips that Singapore investors can deploy to effectively manage their portfolio in a recession.

1. Diversification

It is essential to diversify your investment portfolio to minimise risk.

Diversification can be achieved by investing in different asset classes such as equities, bonds, commodities, and real estate.

A simple way for investors to achieve instant diversification is through Exchange-Traded Funds (ETFs).

2. Defensive stocks

Defensive stocks are usually companies that perform well regardless of the economic cycle.

There is usually constant demand for their products or services so defensive stocks tend to be more stable during the various phases of the business cycle.

This makes them suitable for investors during a recession, where economic activities decline.

Usually, defensive stocks are involved in various sectors such as healthcare, utilities, and consumer staples.

These stocks tend to provide stable returns and are less volatile than other sectors.

In my writeup at the beginning of this year, I highlighted the top 3 recession-proof stocks in Singapore that investors can buy.

3. Value investing

Value investing involves buying stocks that are undervalued by the market but have strong fundamentals.

During a recession, the stock prices of such companies may fall significantly, providing an opportunity for investors to buy them at a discount.

Instead of giving in to “fear, uncertainty and doubt”, or FUD, focus on companies that generate positive operating cash flow, consistent profits and return value to shareholders.

4. Dollar-Cost Averaging

One of the biggest challenges when investing during a recession, or volatile market, is the tendency to overreact to the market.

To avoid allowing your emotions to make decisions for you, investors can look to dollar-cost average (DCA) instead.

This strategy involves investing a fixed amount of money at regular intervals, regardless of market conditions.

By doing so, investors can take advantage of market fluctuations and buy more shares when prices are low.

5. Bond investments

Investing in high-quality bonds can provide a stable source of income during a recession.

Singapore government bonds are considered safe investments and can serve this purpose of stable income.

My colleague, Tim, has written an article on how Singapore investors can buy bonds earlier this year.

He also shared about Singapore Savings Bonds as an alternative to save cash while earning a yield.

6. Real estate

Real estate is generally considered a long-term investment that can provide stable returns over time.

During a recession, property prices may decline, providing an opportunity for investors to purchase properties at a discount.

However, bear in mind that the properties in Singapore property prices continued to climb amid declining sales volumes across all property types, defying economic downside pressures.

The rental market also took off, hitting record highs in the HDB and private property rental markets.

7. Utilise REITs

Singapore Real Estate Investment Trusts (S-REITs) have seen a sharp decline over the last year amid the rising interest rate environment.

As more analysts are expecting higher interest rates for a longer period, this could hurt the S-REITs, especially those with higher borrowing levels.

However, it is worth noting that the average gearing ratio of S-REITs stood at 37.5%, which is well below the regulated gearing ratio limit of 50%.

With an average dividend yield of around 7.2%, this could be an opportune time for investors to use REITs ride out the economic downcycle.

Take advantage of market weakness

It is important to note that every investor’s situation is unique, and there is no one-size-fits-all investment strategy.

However, long-term investors can use the tips mentioned above to ride out the volatility and take advantage of the market weakness to buy some good companies with strong track records, at an attractive price.

It is tempting to try to time the market but we should focus our energies on time spent in the market to take advantage of the overall market movement.

By investing for the long term, investors can generate passive income, build equity, diversify their portfolio, take advantage of tax benefits, and avoid the transaction costs associated with frequent trading.

This is especially true during a recession and bear market.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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