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

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.

About Author

John Rekenthaler

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

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