Since the March bear market, it's been largely good news for ASX shares. The S&P/ASX 200 Index (ASX: XJO) has bounced back strongly as many top companies have surged in value.
It's easy to invest when the market is hot. It's much harder to know how to position your portfolio for a market downturn.
Here are a few tips which I think could be helpful in preparing your portfolio for a recession in the short to medium-term.
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Avoid ASX shares that need discretionary spending
This one seems like a bit of a no-brainer. Recessions mean job losses and job losses mean people don't have spare cash to spend on non-essentials.
I'd say that luxury retailers are the obvious candidate here. It could also include buy now, pay later (BNPL) providers like Afterpay Ltd (ASX: APT) based on lower volumes.
BNPL services could be in high demand as people look to reduce payments. However, that would normally see a spike in defaults which is not good news for companies like Afterpay.
Invest in non-cyclical shares
If discretionary spending is set to fall in a recession, companies with non-cyclical earnings could be the answer.
Companies like Coles Group Ltd (ASX: COL) provide essential products and services. That means a recession doesn't have a huge impact on earnings unlike some other industries.
It could be a good idea to have some non-cyclical or even defensive sector exposure to weather a downturn.
Invest in ASX dividend shares
Growth shares tend to underperform late in the business cycle . That means ASX dividend shares that pay out income on a consistent basis could be the key.
What's even better is ASX dividend shares that are also non-cyclical or defensive. For instance, Coles shares are currently yielding 3.4% which could be a good value in a recession.
Similarly, some top Aussie gold miners could be worth a look. The Northern Star Resources Ltd (ASX: NST) share price has rocketed 18.0% higher this year.
Despite strong capital gains, the ASX gold share is also yielding 1.3% right now. That could be a very handy portfolio addition if we see the economy deteriorate further in 2021.
Foolish takeaway
There are many ways to position a portfolio for a downturn. No one knows what a recession will look like and which ASX shares will outperform.
However, a disciplined, long-term approach to investing can help prepare your portfolio for the ups and downs of the share market.
