How to Protect Yourself Against Investment Losses

Defending against recession is straightforward. When economic fears drive asset prices, high-quality bonds and cash always win

John Rekenthaler 28 June, 2016 | 12:04PM
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There are two principal ways to get hit by the markets. One is to hold economically sensitive securities – stocks, credit-sensitive bonds – entering a recession. The other way is to own expensive assets before their fundamentals out and they lose value. Sometimes, as in 2008, both storms arrive. The first case is a recession bear, and the second a price bear.

Defending against recession bears is straightforward. When economic fears drive asset prices, high-quality bonds and cash always win. There's no going wrong with government bonds. With stocks, large companies that have low debt and stable, recession-resistant revenues will withstand the bear better than the rest. Predicting when the economic sell-off will occur is tricky, but knowing how to invest is not.

Is Everything More Expensive than it Looks?

Guarding against price bears is more situation-dependent. What thrives in one downturn may not thrive in another. For example, small-company value stocks lost significant value along with other equities in October 1987 but held up very well during the 2000 to 2002 growth-stock sell-off. Similarly, high-quality bonds might perform well, as investors make "risk-off" trades and flee to safety, or they might get hit because people believe interest rates will rise.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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John Rekenthaler

John Rekenthaler  John Rekenthaler is vice president of research for Morningstar.