Building a recession-proof portfolio

AA. No, it’s not Alcoholics Anonymous, although investors could be forgiven for taking a nip or two during the market meltdown to dull the pain when they opened up their portfolio statements.

AA.

No, it’s not Alcoholics Anonymous, although investors could be forgiven for taking a nip or two during the market meltdown to dull the pain when they opened up their portfolio statements.

AA also refers to asset allocation, one of the tools investors can use to help them build a recession-proof (resistant is probably a more appropriate word) portfolio.

Asset allocation is the process of determining how your investment portfolio should be invested among different asset classes, such as cash or cash equivalents, income and equities based on your risk tolerance and financial goals.

It involves diversifying or spreading your investments across these asset classes in order to maximize potential returns while minimizing risk. It’s the process putting your eggs in different baskets.

“It’s important not to let market cycles control what you do, such as moving all your money to cash in bad times,” said Patricia Lovett-Reid, senior vice-president of TD Waterhouse Canada.

“It should be driven by your aspirations, lifestyle and risk tolerance, but not by the market cycle.

It’s not a bad idea to keep five or 10 per cent of your portfolio in cash for buying opportunities.”

Assets also can be allocated by market sectors and geographical areas.

“A conservative approach would be to invest in utilities, consumer goods and pharmaceuticals, things that people are going to buy regardless of what’s going on, things that are not as sensitive to economic cycles,” she said.

The Toronto Stock Exchange, for example, has a heavy orientation (about 70 per cent) to metals, mining and energy. If you want to invest in other sectors, you may have to go to other markets to get the allocation you’re looking for.

Lovett-Reid suggests investors may want to look at infrastructure companies that could be the recipients of recent government stimulus spending.

“It’d be great if you can jump in early before the money is invested,” she said. “But if you don’t, you can still look at it as longer-play investment. But I would suggest only a small concentration, maybe five to 10 per cent.”

Another good play is to invest some money in gold, which traditionally is a hedge against inflation and financial uncertainty. Lovett-Reid suggests finding a good resource fund or a gold exchange-traded fund that will give you broad exposure to the gold market.

Is it too late to reallocate your fund now that the recession is already here?

“It’s never too late to readdress your asset allocation,” she said. “Again, the economic cycle should not be the driving force.”

Asset allocation can have a tremendous impact on investment returns. Developing an investment plan that is diversified and compliments your goals and risk tolerance is the first step in developing a personal investment strategy.

Once you know what you want to achieve and when, you can decide how to achieve it by selecting the investments that work for you.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.

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