Opinion: How to navigate increased risks investors face with the coming recession

With the economy seemingly heading for a recession, whether short, shallow, deep, or long, it is only natural for investors to be concerned about their investment portfolios and volatile market conditions.

There have been a host of events throughout 2022 that have been driving market reaction, from the Federal Reserve’s interest rate hikes to mid-term elections, not to mention political unrest around the globe. Whether it is inflation numbers, Consumer Price Index figures, retail sales figures, housing sales, unemployment figures, or energy costs, there is a lot of information available to make investors nervous, and nervous investors lead to volatile markets. 

A sudden decline in the value of stocks may cause some investors to liquidate their holdings immediately, locking in losses. After incurring such a loss, the investor may be hesitant to reinvest, making it even more difficult to recover those losses and grow their money during a recession.

Before liquidating your investments, stop and consider why you want to sell your positions. Have your goals changed? Has your risk tolerance changed? Or are current market events and the continuing uncertainty simply making you uncomfortable? 

If your circumstances have changed, then it might be the right time to sit down with your financial professional and review your portfolio and your strategy. But if your objectives have not changed and you are investing for the long term, take a step back and try to avoid any knee-jerk reactions to current market events.

While this may still be a good time to review individual investments, if you have a well-diversified and asset allocated portfolio, you are likely already well positioned for a recovery when economic circumstances change.  

During a recession, some investments are more likely to be impacted than others. Knowing which investments to avoid may be just as important as knowing which ones to keep.

For example, companies that are highly leveraged, cyclical, or heavily reliant upon discretionary consumer spending (think luxury items, dining out, furniture and tourism) are likely to suffer declines. Additionally, in our current rising interest rate environment, companies that are more reliant on borrowing for their sales, such as home builders, developers, mortgage brokers, or generally anything connected to construction, are also likely to decline.

This might also include technology companies or growth companies, where there is a need to finance new manufacturing facilities or enhanced technology. For example, a project that would have pursued at 2% interest rates, may simply not be viable at 4%. 

A recession does not have to mean you should hold off on investing altogether. If you are investing for retirement, or for the longer term in general, look for companies that are well managed, have strong balance sheets, low debt ratios, and good cash flow. These companies are more likely to weather the storm than those that are reliant on financing or consumer spending. They may also be a relative bargain during a declining market.

There are also industries that are typically more recession-resistant than others, such as utilities, discount retailers, consumer staples, and health care. 

Before liquidating your investments, remember that every recession comes to an end. The economy rebounds and investments recover. Even in the face of uncertainty, it is important to avoid panicking and remember that ups and downs are a regular part of investing.

If you are nervous, or your investment losses are keeping you up at night, talk to your financial professional. Evaluate individual investments to see if they still fit your long-term goals. But avoid acting on impulse or making rash decisions. Stay focused on your long-term goals. 

Tara A. LaClair is an attorney with Crowe & Dunlevy, crowedunlevy.com, and a co-chair of the Securities Litigation, Enforcement & Compliance Practice Group.