This article covers my third step in preparing for a recession: playing with your portfolio. I strongly suggest you read my articles on building an emergency fund and reviewing your finances in the first instance.
Play with your portfolio
In my previous article on reviewing your finances, I mentioned that preparing your taxes is a great way to potentially boost your cash flow in tough times. One step before this, you should review your ASX share portfolio.
At any point in time, you should be able to look at your portfolio and feel comfortable holding each stock for the long-term. This comes in two parts:
Firstly, are you happy having a share or two represent an outsized portion of your stock portfolio? In general, your long-term winners will grow as a percentage of your investment portfolio.
For me, that’s Altium Limited (ASX: ALU) and Trade Desk Inc (NASDAQ: TTD). They may be great businesses which you want to hold onto going forward, but your diversification is reduced if 20% of your portfolio is in one stock.
Work out what percentage will let you sleep at night and sell down a position as required.
Alignment with your needs, goals and objectives
Additionally, when reviewing your portfolio overall, it should reflect your personal circumstances and goals. A few questions to ask yourself are:
- Do I need any of this money in the next few years?
- Do I have the right balance of growth, dividend and value shares?
- Am I diversified enough by industry, market capitalisation and geographically?
Tax loss selling
Once you have asked yourself these questions, it may be worth considering tax loss selling. As part of your tax planning and portfolio review, you’ll likely identify some companies that you don’t want to hold going forward which are in a capital loss position. These capital losses can be offset against capital gains in the year they are incurred, or carried forward.
Another benefit of this is that your remaining portfolio reflects your highest conviction investments going forward.
As always, discuss this with your accountant based on your personal circumstances.
Buy recession-resistant and discounted shares
As we’ve seen in the past, the stock market doesn’t perform well in recessions. However, this can provide the opportunity to buy quality businesses at lower valuations.
Not all businesses or industries are built the same. Industries like consumer staples or utilities are necessities in both good times and bad. Just look at Coles Group Ltd (ASX: COL) which has handily beaten the market recently.
Subscription-based businesses can also do quite well in recessions. A perfect example of this is Netflix Inc (NASDAQ: NFLX).
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Lloyd Prout owns shares in Altium Limited and The Trade Desk, Inc. and expresses his own opinions. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Netflix and The Trade Desk. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended Cochlear Ltd., Netflix, REA Group Limited, and The Trade Desk. 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.