There's been a lot of talk recently that the Australia economy is hurtling towards its first recession in 20-something years.
There are valid arguments to be made for and against a recession.
But you'd be mistaken to believe that talk of a recession is always a signal to sell your shares, pack your bags full of baked beans and shotgun shells, and head for the hills.
Undoubtedly, you might save money accurately predicting the next recession. However, what happens there is no recession, or you miss the subsequent rally in share prices?
Then, overlay such that same frail temperament with the adage, economists have predicted nine of the last two recessions.
In my opinion, trying to predict the next market crash or recession is a fool's errand.
Recession proofing
Instead, all investors should take far simpler – and less costly – steps to protect their wealth, including:
- Keeping an adequate cash balance for, say, six months of living expenses
- Don't have any money invested in the sharemarket that you'll need in the next five years.
- Maintain a well-diversified portfolio.
3 stocks to consider
Stocks to consider holding throughout a market downturn are those with strong competitive advantages, counter-cyclical features, and defensive profits.
Competitive advantage: One perfect example of a strong defensive business with an advantage over its peers is Wesfarmers Ltd (ASX: WES). The conglomerate owner of Coles, Bunnings Warehouse, Kmart, Officeworks and much more enjoys a steady defensive earnings base that will see it through even the worst recession.
Counter-cyclical: As one of Australia's leading debt collectors, Collection House Ltd (ASX: CLH), buys distressed credit from a reliable customer base very cheaply. In a recession, successful returns on its purchased debt may fall, but chances are the debts themselves will also come to the company at a far cheaper price.
Defensive: Ramsay Health Care Limited (ASX: RHC) shares have come off the boil in recent weeks. However, as a globally diversified and growing hospital owner and operator, there are many reasons to consider taking a second look at the company if prices continue to fall.
Foolish Takeaway
Don't fear a recession because one is going to come along sooner or later. Indeed, there is always something that pundits say should be feared.
But as we approach a period of potential economic weakness, ensure the companies in your portfolio are financially sound and can survive.
Further, try to find companies that have the ability to pay dividends no matter what the economic climate because they can provide a valuable source of income which can be reinvested or taken as cash.
