How to Prepare Your Portfolio for a Potential Recession in 2023

If you’re worried about how a slowdown in the economy may impact your investments, here’s how you can be more prepared.

| More on:
You Should Know This

Image source: Getty Images

When investors hear about a potential recession in 2023, it’s natural to want to avoid it. However, as you invest for the long haul and experience numerous recessions and stock market selloffs, it quickly becomes clear that these are the best opportunities to buy high-quality stocks while they trade undervalued.

Furthermore, while a recession has the potential to be devastating, not all recessions are equally disastrous. All a recession means is that the economy’s growth has temporarily stalled. A significant decline in gross domestic product (GDP) could cause a massive strain on the economy. But a slight dip in GDP growth, while also classified as a recession, won’t nearly have the same devastating effects.

Furthermore, recessions don’t last forever, and governments and central banks can often help turn the economy around in just a few quarters.

While we can’t ignore the fact that there’s potential for a recession either later this year or in 2023, we also don’t have to worry too much about its impacts on our portfolios, particularly if we’re investing for the long term.

With that being said, though, there are a few measures you can take to ensure that should a recession come, its negative impacts will be limited, and you have the potential to take advantage of the situation.

Here are a few measures to prepare your portfolio for a potential recession in 2023.

Ensure your stocks are high-quality and excellent long-term investments

Recessions typically don’t last too long, but there’s always a possibility they can be prolonged. Furthermore, they can cause stock markets to sell off and many companies to lose market value.

Therefore, the first thing to do to prepare your portfolio for a potential recession in 2023 is to ensure that any stocks you hold are stocks you’re comfortable owning for years.

The best stocks to consider are ones with defensive and reliable businesses, solid financials, and that pay attractive dividends.

Since it’s possible that these stocks can trade undervalued for some time, it’s essential that you can commit to owning them for years, because the last thing you want to do is sell these investments in the middle of a recession and bear market, where they are trading at dirt-cheap valuations.

Make sure you have adequate cash before a potential recession starts in 2023

In addition to ensuring that your portfolio holdings are high-quality and robust businesses, it’s also crucial to ensure you have an adequate cash position.

That doesn’t mean you should rush to sell stocks now, especially after many equities have already lost a tonne of value in the last few months.

However, ensuring you have enough cash for non-investing reasons, such as an emergency fund, is crucial. I’d also look to raise cash by selling highly risky businesses you don’t have confidence holding through a recession.

And, of course, with more stock market selloffs possible, I would be patient with any savings you add to your portfolio over the next few quarters before putting them to work. There are certainly already a lot of attractive deals in the market, but there could be even more opportunities for investors if the selloff continues.

Therefore, ensuring you have an adequate level of cash — both in your portfolio and in your bank accounts — will be crucial to preparing for a potential recession in 2023.

If you need more defence, I’d look to buy these stocks now

Lastly, if you already have a tonne of cash or lack highly defensive assets, you may want to consider recession-resistant stocks now. For example, a utility stock like Emera (TSX:EMA) is an ideal candidate in these environments.

First, Emera’s business operations, providing gas and electricity utilities, are essential and hardly see any change in demand whether the economy is booming or not. In addition, governments regulate utilities, which helps to reduce risk even further.

Moreover, these stocks are some of the least-volatile investments you can buy, meaning they’ll protect your capital well, even if the market is selling off. Plus, they return attractive passive income to investors.

If you’re looking to prepare for a potential recession on the horizon, it’s crucial to own highly safe stocks such as Emera.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool recommends EMERA INCORPORATED.

More on Investing

Red siren flashing
Dividend Stocks

Buy Alert: This Energy Stock Is Unstoppable After Strong Results

Tourmaline Oil (TSX:TOU) beat earnings and looks unstoppable.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

1 TSX Sector I’m Bullish on in October 2022

Renewable energy is exactly where investors should sit on their cash, so this is the top stock I'd recommend to…

Read more »

A worker uses a laptop inside a restaurant.

5 Things to Know About Rogers Communications Stock

Rogers Communications (TSX:RCI.B) stock is a big deal, but there are five things you might not know about it.

Read more »

Technology, internet and networking, security concept
Tech Stocks

Why Blackberry Stock (TSX:BB) Fell 16.5% in September

While general macroeconomic weakness hit Blackberry stock hard in September, the company has a lot to look forward to.

Read more »

Electric car being charged
Tech Stocks

3 Stocks That Could be Worth More than Tesla by 2032

Tesla stock is riding high, but these three stocks could someday eclipse it.

Read more »

Female hand holding piggy bank. Save money and financial investment
Dividend Stocks

2 Safe Dividend Stocks to Beat Inflation

Canadian investors, young and old alike, can cope with or even beat inflation by owning two safe dividend stocks.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

2 Canadian Dividend Stocks (With +6% Yields) You’ll Regret Not Buying at These Prices

TSX dividend stocks such as TC Energy and TransAlta Renewable are well poised to deliver consistent returns to long-term investors.

Read more »

Target. Stand out from the crowd

My Take: 4 Strong TSX Stocks to Buy This Week

Despite the current market direction, quite a few stocks are exhibiting signs of a bullish trend building, making them worth…

Read more »