Recession-proof Your Portfolio

The next recession is coming on strong, but you're not helpless. Here's how to protect your investment portfolio in tough economic times.

The Federal Reserve is on a lengthy rate-cut spree, and the U.S. dollar currently buys fewer and fewer yen and euros. The economy is in trouble, and your investments are going to suffer. Right?

Not necessarily. You can take a few steps to insulate your assets from the ravages of a beastly economy. Here are two possible approaches.

Better safe than sorry

One option is to get out of the market. Liquidate your stocks and bonds, because they're exposed to moving interest rates and shifting investor sentiment. Once you're in cash, it can still work for you, even if you stick with the safest investments available. Some high-yield money market accounts can outrun inflation, but it takes a high balance to earn the best rates. Right now, some banks offer a 4 percent annual yield if you have at least $10,000 to sock away.

If you have a slightly smaller nest egg, but won't need the money for many years, a certificate of deposit (CD) could be just what the money manager ordered. Interest rates on CDs don't depend on the amount you invest, but on how long you can keep your hands off the cash. The best CD rates currently stand at 3.75 percent for a three-month holding term, about 4 percent for a one-year certificate, and 4.5 percent for a five-year investment. The rates are attractive and, although it takes patience and discipline to own a CD, it can sometimes be your best choice.

You say risk, I say reward

If you have a very long investment horizon, with decades before entering your golden years, putting all your investments in cash may not be a good idea. A deep market gash, like the one we're experiencing, could work to your advantage. The stock market has crashed several times in the last century, but it always came back to rise above the troubled times.

During a recession, park your money in blue-chip stocks that aren't as sensitive to stock market swings. However dark the times, everyone needs to eat, for example. Supermarkets and food producers spring to mind. Then, when you see signs that the hardship is over, pick up shares of the very best companies in the problem sectors-the survivors-in the fire sale of the decade. The last couple of years have been rough on homebuilders and mortgage specialists, for example.

Hybrid investors

The smartest choice may be to combine these two styles. Forego the "safe" stocks, and shift your holdings to cash accounts or CDs until the red flags are gone; then you can go back to Wall Street or the bond market.

Economic ruin on a macro scale doesn't have to spell disaster for your personal wealth. Some prudent moves at the right time is all it takes, and you'll be back to growing your wealth again in no time.