How to help recession-proof your ASX share portfolio in May 2024

There are some quick and easy ways to recession-proof your ASX share portfolio.

| More on:
A banker uses his hands to protects a pile of coins on his desk, indicating a possible inflation hedge

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Recessions can wreak havoc on your share portfolio. They are a sign that the economy is contracting, and business conditions are getting tougher. Unemployment is high, consumer confidence is low, and households are finding it harder to pay their bills. Some companies, particularly junior companies with high debt, might even go kaput. Share prices, on the whole, are in the toilet.

Sounds scary, right?

Well, don't get too despondent. There are some quick and easy ways to recession-proof your ASX share portfolio. In this article, I'll cover 3 of them.

Diversify

The quickest and easiest way for any investor to recession-proof their portfolio is simply through diversification. Spreading your investments out over a range of different companies, industries, and even asset classes is one of the easiest ways to ensure your portfolio can ride out a recession.

At heart, diversification relies on the fact that, depending on the nature of their business operations, different shares will respond differently to the same macroeconomic event. One share might increase in price, while another might fall. If you only own one, there's a 50% chance you'll lose money. But if you owned both, you'll have a better chance of coming out even – or maybe even on top. Either way, being diversified has limited your downside risk.

For example, a higher global oil price is a risk for airlines because it increases fuel costs – bad news for you, too, if you're a Qantas Airways Limited (ASX: QAN) shareholder. But if you also had some stock in an oil company like Woodside Energy Group Ltd (ASX: WDS), which will benefit from higher oil prices, you could potentially offset some (or maybe even all) of the losses on your Qantas shares.

The same holds true in a recession. Although a recession will likely cause share prices to fall pretty much right across the board – and may even result in a prolonged bear market – not all shares will be impacted equally. Some will fall a lot less than others, and a lucky few might even rise. This means that an investor with a diversified portfolio has a much better chance of limiting their downside losses and beating the market.

Buy some defensive shares

It's all good to diversify, but if you want to recession-proof your portfolio, you need to diversify in the right places. And one of the best places to start is defensive shares.

Defensive shares are a group of shares that tend to outperform in an economic downturn. These are companies that people view as being essential, like consumer staples, healthcare, and utilities. Even when times are tough, households still spend money on them, which allows these companies to continue to be relatively profitable, even in a recession.

There are differing opinions about what makes an ideal defensive share, and you never quite know how a stock will really perform under pressure. But some common ASX examples include supermarket chain Woolworths Group Ltd (ASX: WOW), telco Telstra Group Ltd (ASX: TLS), and toll road operator Transurban Group (ASX: TCL).

Buy safe-haven assets

Investing a portion of your portfolio in safe-haven assets is probably the best way to protect your portfolio from a recession. Throughout history, safe-haven assets have proven themselves to be the most reliable stores of value. In other words, the prices of these assets don't decline (in fact, they may even rise) during a financial crisis.

Safe haven assets include some major global currencies (like the Swiss franc or the US dollar – the jury's still out on Bitcoin), government bonds, and precious metals. But the granddaddy of all safe-haven assets is gold.

Adding some gold exposure to your portfolio has never been easier – check out our useful guide for investing in gold if you want some tips. One great option for ASX investors to access gold is through an exchange-traded fund (ETF) like the Global X Physical Gold ETF (ASX: GOLD). And because the fund is backed by physical gold (as opposed to futures contracts), the Global X ETF returns should replicate those of gold quite closely.

The Foolish bottom line

There are some easy ways you can fortify your portfolio against the adverse effects of a recession. In this article, I've covered diversification, defensive shares, and safe-haven assets.

However, also keep in mind that you are giving up some growth opportunities by investing only in defensive shares and safe haven assets. These are low-risk, low-reward investments. So, although these assets are more likely to outperform in a recession, they are almost certain to underperform when the economy is booming.

A well-balanced portfolio that caters to your personal risk appetite and growth objectives is the optimal scenario. So, at the end of the day, don't fixate too much on recession risks – you want a portfolio that can benefit when the economy is strong too!

Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Transurban Group. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Investing Strategies

Father in the ocean with his daughters, symbolising passive income.
Dividend Investing

3 top ASX 300 dividend shares to buy now for $3,000 a month in passive income

I think the long-term passive income potential remains very strong for these ASX dividend stocks.

Read more »

three young children weariing business suits, helmets and old fashioned aviator goggles wear aeroplane wings on their backs and jump with one arm outstretched into the air in an arid, sandy landscape.
Dividend Investing

3 ASX shares with a long history of increasing dividends

These stocks keep giving investors pay raises.

Read more »

An elderly retiree holds her wine glass up while dancing at a party feeling happy about her ASX shares investments especially Brickworks for its dividends
Dividend Investing

2 cheap ASX dividend shares I'd buy in retirement

I think retirees will love these two dividend stocks.

Read more »

A smartly-dressed businesswoman walks outside while making a trade on her mobile phone.
Dividend Investing

Here's the new Telstra dividend forecast through to 2026

Here's what analysts are forecasting for the telco giant's dividend.

Read more »

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Happy man holding Australian dollar notes, representing dividends.
Dividend Investing

4 excellent ASX dividend stocks to buy in June

Brokers expects great returns from these income options.

Read more »

Legendary share market investing expert and owner of Berkshire Hathaway Warren Buffett
Investing Strategies

3 pearls of Warren Buffett wisdom I think all ASX investors need right now

The Sage of Omaha has some great advice to call on.

Read more »

A businessman lights up the fifth star in a lineup, indicating positive share price for a top performer
Blue Chip Shares

2 of the best ASX 200 blue chip shares that money can buy

Morgans has these blue chips on its best ideas list.

Read more »