If you’re only interested in the 5 ways to protect your portfolio, keep reading or skip to ~42 minutes into the video.

Without further ado, here’s my list of 5 things…

#1 – Have a ‘Go Bag’

A ‘Go Bag’ is my name for an emergency fund. Its name comes from the spy business, where a bag filled with cash, a gun and passports can get a spy out of trouble.

For most people, 6 months of living expenses set aside in cash is the best insurance you can get for your portfolio. Put this in an offset account, cash savings account, or mixture of term deposits. For retirees, the figure should be ~2 years of actual living expenses in cash.

The reason I have this as my number-one recession-proof tip is that it costs nothing (you’ll earn interest!) and it gives you the peace of mind to invest confidently in a market downturn.

On my Australian Investors Podcast series, one of the things the best investors tell me is “you can’t invest your way out of a savings mistake”.

Meaning, most people jump to investing, hoping it will make them wealthy, when the best thing to do is to have rock-solid finances.

#2 – Have any plan

I see so many investors who become “collectors” of assets. While this strategy is great for new investors (“buy anything” is better than buying nothing), eventually you can find yourself with a lot of assets — such as 30 stocks and 20 ETFs.

This happens because most of us are great at buying things but not so good at selling or creating an investment plan.

A concise and simple investment plan is a great way to keep calm under pressure. Many financial planning clients get most of their value from simply having a plan when things turn pear-shaped.

Your investment plan should be written down — but it doesn’t have to be complex.

To get you started, answer these 5 questions:

1. Why am I investing? If you have 2-3 long-term goals (retirement, education expenses, child’s first home, etc.) write them down, how much you’ll need and the rough timeline.

2. How will I invest my Core portfolio between “growth” (shares, property, etc.) and defensive (bonds, term deposits, some commodities, etc.) assets? A 60-40 split of growth-defensive might be considered balanced while a younger, higher-risk investor might have a 90-10 portfolio.

3. When will I rebalance my portfolio? Don’t set this as something arbitrary like ‘every three months’, do it when your portfolio is X% out of balance. For example, ‘I’ll rebalance my portfolio when the Core portfolio is 5% out of balance. Rather than sell and incur tax, I’ll add more to the smaller part.’

4. How will I manage my taxes? You could use a portfolio tool like Sharesight to track your holdings. However, this part of your plan might be as simple as, ‘I’ll aim to hold most of my investments for 12+ months so I can capture the capital gains tax discount’ and ‘I’ll invest the majority of my shares exposure in Australian companies to capture franking credits from dividends.’

5. How much and how often will I invest? If you get paid monthly, will you add money to your portfolio every month? Will you then invest in new positions on a particular day (e.g. the 4th of every month)? Set a calendar reminder or use automation to make this easier.

#3 – Diversify properly 

Source: Google Finance

Thanks to ETFs and index funds available through brokers like Selfwealth, it’s easier than ever to diversify. 5-10 ETFs is most likely all you need to build a truly diversified portfolio.

A truly diversified portfolio can’t do worse than the worst investment and can’t do better than the best investment. What diversification does is smooth your investment returns.

As you can see in the chart above, having too much technology exposure and being underweight energy companies over the past year would have been a big hit to performance. A diversified index fund ETF would have covered both bases.

#4 – Just. Keep. Buying

Source: Google Trends

The chart above shows the search interest inside Google Search for terms like “market crash” and “recession”. As you can see, news on “recession” has always been sought out — every single year since history began (2004). Yet, in that time we’ve only been in a recession for about 3 months (during 202o), and the stock market has rallied.

Indeed despite the constant news cycle featuring doom and gloom, the Australian stock market has outperformed almost every other asset class when dividends are reinvested.

The Australian stock market has 122 years of history and 81% of those years have been positive. That means 4/5 produce positive results — or one in every four years is negative.

It’s pretty simple. Just. Keep. Buying.

#5 – Follow an investment process

Most investors don’t follow a consistent investment process inside their brokerage. During a market crash or a recession is when you wish you had one because it allows you to test and iterate certain ideas or strategies.

Did this strategy work?

Was that a good investment?

Those questions can only be answered if a consistent decision-making framework is followed.

As I show above, it doesn’t have to be complicated. You could use a simple investment checklist, like Warren Buffett’s stock checklist. Or if you’re an ETF investor, keep it simple and focus on low cost, diversified, passive index fund ETFs.

I like to separate my individual shares / Satellite away from my Core portfolio (i.e. they’re even in separate brokerage accounts) so that I can follow a separate investment process that’s appropriate for each strategy.

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While a recession sounds scary, Australian shares have a very very strong track record of paying dividends and growing throughout market cycles. And let’s be honest, recessions can be a healthy thing for economies and companies in the long run.

In coming weeks on Selfwealth Live I’ll be covering the exact things you can look for in company financial results during a recession.

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