Ready for Recession? Here are 5 Ways to Prep Your Portfolio for the Worst

Recessions? What are those?

According to the U.S. National Bureau of Economic Research, the official statistic arbiter of recessions, our economy hasn't had a recession in 10 years. This ties with the 1991-to-2001 period for the longest economic expansion in American history!

However, unless you're new to investing, you should remember the 2008-'09 financial crisis and the accompanying recession that started in December 2007 and ended in June 2009.

The S&P 500 lost 56% of its value, and it took more than five years to recover. The Nasdaq got hit even harder, losing 77% of its value.

I can't tell you if the stock market will fare worse or better in the next recession, but I do know it will be painful.

How painful? History tells us that there have been 12 bear markets since 1945. They lasted an average of 13 months, and stocks declined by an average of 30%.

Could you emotionally tolerate a 30% drop in your portfolio value? Are you willing to wait a little more than a year (if you're lucky) to get back to even?

For some, the answer is "yes." For others, however, the answer is "NO." This means you need a clear strategy to protect your portfolio when the tough times come.

There are really only five defensive strategies to consider …

Bear Market Strategy #1:
Short-selling

When you buy a stock, you are betting it will go up. And when you sell a stock "short," you are betting it will go down.

To short-sell a stock, your broker loans shares to you. Those shares are sold, and the proceeds are credited to your account. Sooner or later, you must "close" the short by buying back the same number of shares and returning them to your broker. This is called "covering" your shorts.

If the stock price drops further, that's great — you can buy back the stock at the lower price and make a profit on the difference. The risk here is that, if the price of the stock rises, you have to buy it back at the higher price — which means you lose money.

Most investors don't have the stomach for that type of reverse pain, especially because losses from short-selling can be unlimited.

This next strategy might suit you MUCH better …

Bear Market Strategy #2:
Inverse Funds and ETFs

Some mutual funds and Exchange-Traded Funds (ETFs) are designed to profit from falling stock prices.

For example, the ProShares Short QQQ (PSQ) ETF is designed to track the inverse of the daily performance of the 100 largest domestic and international non-financial companies listed on the tech-heavy Nasdaq.

So for every 10% the Nasdaq-100 drops, the ETF is meant to go up 10%.

Of course, the opposite can happen: If the underlying index rises 10%, this ETF could drop 10%.

When the time is right, I will recommend inverses ETFs in my Weiss Ultimate Portfolio subscribers. So if that interests you, consider a no-risk trial subscription today.

Bear Market Strategy #3:
Buying Put Options

Buying options can be a low-cost way to play the markets. In particular, buying put options can position you to profit from falling prices in the markets, in a sector or in a specific stock.

A put option contract gives its owner the right, but not the obligation, to sell a specific number of shares of the underlying asset (i.e., a stock, ETF, commodity, you name it) at a specific price within a specific time frame. You can buy put options on everything from Microsoft, China Mobile and General Motors … to gold, energy, techs and banks.

If the underlying asset price falls while you own the puts, the value of your options will likely go up significantly. What happens if the stock, ETF or commodity goes up? Then your put options could go down in value and potentially expire without being worth anything.

The key here is that you can only lose as much as you paid for the options, while your profit potential has no ceiling. This nice risk/reward potential could very well be the best way to protect your portfolio from a bear market.

Bear Market Strategy #4:
Cash!

Perhaps the easiest thing you can put a meaningful chunk of your portfolio into is cash. Unfortunately, cash doesn't pay much these days. But the best thing about cash is that it holds it value no matter how far the stock market falls. And when prices bottom out, think of all the bargains you can scoop up!

Bear Market Strategy #5:
Buy what I'm buying for Martin's portfolio …

Buy the stocks with the highest Weiss Ratings. (Stocks rated "B" are buys, and "As" are strong buys.)

Even better, buy the ones with the highest Weiss Performance Ratings, which is what we do in my Weiss Ultimate Portfolio service. We don't publish these ratings, but I use them when I'm deciding where to invest Martin Weiss' cash next … and I give subscribers a head start to get their trades placed before we make any moves. See how this strategy works — and how well it works — here.

Now, don't run out and implement all of these strategies right away. (Except the fifth one — I'd love to get you on board before my next recommendation goes out this afternoon!)

The first four entail substantial risk, and timing is everything. But doing nothing at all could get clobbered.

Most people think they can ride out recessions and bear markets. But the reality is that history shows most investors, professional and individual alike, panic and sell when the pain gets too severe. And that's just as bad as doing nothing at all!

Best wishes,
Tony Sagami