Key Points
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With recession concerns growing, it’s wise to review your investing strategy right now.
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Strong stocks are far more likely to pull through periods of volatility.
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There are several factors to consider when examining your portfolio’s overall health.
Many investors have been on edge for months, with concerns that an AI bubble or a weakening job market could lead to a recession. But now, amid increased political uncertainty and conflict abroad, fears about the stock market are amping up.
To be clear, nobody knows what the market will do in the near term. Even the best economists in the world cannot guarantee that a market crash or recession will or will not occur in the coming months.
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However, no matter what happens with the market, there’s one crucial move all investors should make right now.
Bear figurine against a stock market downturn chart.
Image source: Getty Images.
Solid foundations are key
Where you choose to invest will perhaps have the biggest impact on how your portfolio fares during a recession.
During periods of prosperity, it can sometimes be tough to differentiate strong investments from weak ones, as even shaky stocks can soar in price. This is especially true of companies in hyped-up industries, as many investors are eager to buy into a sector without necessarily considering whether a stock is a viable long-term investment.
Company health can also change over time. A once-strong organization may experience a major change in leadership, for example, and the new folks in charge begin making questionable business decisions. Or the industry landscape shifts, and a company that used to dominate the space is now struggling to keep up with its peers.
In all of these cases, weak companies are much more likely to struggle during tough economic times. Recessions are the ultimate test of strength, and companies on shaky foundations could very well crash and burn if the market takes a turn for the worse.
How to protect your portfolio
The best way to safeguard your portfolio against a market crash or recession is to invest only in high-quality stocks with solid fundamentals.
While there are many factors to consider when choosing stocks, a few of the most important signs of a strong company include:
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Competitive advantage: Some companies simply have more to offer than their competitors, whether it’s lower prices, superior customer service, or higher-quality goods. The stronger a company’s competitive advantage in its industry, the greater its chances of surviving a recession.
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Industry potential: As times change, sometimes entire industries struggle to remain relevant. Even if a business is fundamentally sound, it may still struggle to thrive if it’s part of a dying industry.
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Competent leadership team: An executive team’s decisions during pivotal moments can make or break a company’s potential. If a company is otherwise strong but its leaders consistently make questionable decisions, that stock may not be as reliable during tough economic times.
A strong portfolio of healthy stocks is highly likely to weather even the worst market downturns or recessions. No matter what lies ahead for the market, the right strategy can recession-proof your portfolio.
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