How to Become Recession-Proof

Predicting the length of a recession is like standing on a beach, predicting the number of tides in the ocean. You know it's there; but you wonder when will it finally recede. If you buy into the assertion that a recession is just the cycle of the economy, and that things will eventually get better , here are few changes in your financial affairs that might be in order. Whether you steer for cover, batten the hatches, or merely trim your sails, there are some basic changes you can implement to help you through:

Build your cash reserves

Cash will be your cushion if you lose your job. It will help you sleep nights. And it will enable you to take advantage of investment bargains that inevitably become available as the economy begins to recover. Reduce debt. Excessive personal debt becomes even more unmanageable when times are tight. Pay off your credit cards and revolving charge accounts, and consider putting off major purchases such as a new car or larger home until the economic trend reverses.

Stay liquid. Liquid means any investment that can be turned into cash in seven days or less. Most experts say during a recession investors should be focused in money market funds, stocks, bonds, futures contracts and options. In addition to having money available should you lose your job, liquidity gives you the flexibility to take advantages of changing market trends as the economy begins to renew itself.Hedge your bets. Ask yourself if there's a plausible form of risk reduction you can apply to each of your investments. That means stop-loss orders for stocks, portfolio hedging with index futures, writing covered calls (and/or) some form of mutual fund timing. Hedges are like insurance policies: your overall investment return is likely to be lower with them, but when the market goes against you, they can sometimes more than cover your losses.

Diversify. Portfolio diversification is the simplest and least expensive way to reduce investment risk. As some are fond of saying, there's always a bull market somewhere, even in the worst of economic times. With stocks, invest in several industries, perhaps focusing on those that are typically least affected by recessions: food, utilities, drugs, tobacco and waste management, for example.

High-quality bonds are usually a good recession bet. Bonds pay regular interest, and as the economic slowdown forces interest rates lower, the bond prices will rise. You should buy and hold those with short maturities right now. Bond prices go up and down a lot more than most people realize, but there's more stability with the shorter-term maturities. Municipal bonds will likely grow in popularity over the coming months, as investors look to escape from potentially higher tax bills while seeking price appreciation and reliable income.

Lengthen your horizons. Setting your sights somewhere beyond the horizon, judging your investment performance over longer periods of time, years instead of weeks, will almost always lead to satisfactory results. By moving your chair farther up the beach, you can see that horizon more clearly, without the distraction of the incoming tide and its choppy waves.