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How to fortify your ASX portfolio for 2020

According to the Australian Financial Review, hedge-fund king and macroeconomic trend expert Ray Dalio is warning that the likelihood of a recession in the US (and therefore likely Australia) in either 2019 or 2020 is now sitting at about 25 per cent.

In addition, he is warning that central banks like the Reserve Bank of Australia (RBA) and the US Federal Reserve will have limited powers in dealing with it, as interest rates are already so low.

Ray Dalio manages Bridgewater Associates, the largest hedge fund in the world with assets under management of around US$160 billion. He famously predicted the GFC in 2008 and managed to protect Bridgewater’s portfolios from any significant losses during the global financial meltdown.

So if another recession is indeed on the horizon, how would one protect and fortify an ASX portfolio? Here are three ways.

Gold

Mr Dalio says that he expects gold will “be in demand as investors seek alternative forms of money as central bank stimulus nears the limit of its effectiveness.”

Gold has always been the traditional way to protect against stock market downside, but Dalio is also attracted to its inflation-hedging nature and its value as ‘real money’. You can always buy physical bullion, but an easier way to get some gold exposure might be through an exchange traded fund (ETF) like ETFS Physical Gold (ASX: GOLD). Gold miners like Newcrest Mining Ltd (ASX: NCM) might also be an option, albeit a riskier one.

Bonds

Although bonds are the classic way to hedge a portfolio, I don’t believe they present real value this time around as a consequence of our record low interest rates. Still, if you’re ‘old-school’, a bond ETF like Vanguard Australian Fixed Interest Index ETF (ASX: VAF) might be something to consider.

Defensive dividend-paying shares

If a company has a solid, recession-proof earnings base with a strong dividend, this will also provide some nice cover during a recession. Stocks like Transurban Group (ASX: TCL) and Coles Group Ltd (ASX: COL) come to mind. I don’t expect people to stop driving or eating anytime soon (despite the economic weather), so you can likely count on companies like these to keep the dividends rolling in.

Foolish takeaway

I do think that Ray Dalio’s views should be taken seriously, as he has a very good history of knowing what might be around the corner. Some gentle repositioning may be a good idea at this point, considering we are now 11 years out from the GFC – and you know what they say about history…

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Transurban Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.