The Best Ways The Rich Build a Recession-Proof Investment Portfolio

You know, Alexir, the rich come out almost unscathed during recessions. In fact, many come out in better shape than when the recession started. The world can shout about bailouts as loud as they want, but if you look deeper into it, you'll see their growth during recessions comes from knowledge and experience. Their knowledge helps them to make smart decisions, and their experience makes them resilient.

Here, we're sharing their knowledge because they're not investing in cyclical small cap or high growth tech stock during periods of economic downturn. No, they're not investing in real estate in overvalued markets, luxury goods, or commodities like oil, copper, and agricultural products. Because they know that during recessions, demand for these things decrease, leading to price drops.

Now, they invest in things that provide stability and income, and today we're getting into exactly what that looks like. They diversify across asset classes; they always spread the risk by investing in different asset classes. Even if you only have one egg, it's better to crack that and put it in multiple baskets rather than keeping one and putting it all in a single basket. That small crack will build up eventually over time, but if you put that egg in one basket, you can lose everything in a single go.

Your portfolio needs a balance, no matter how small it is. During a recession, stock prices may fall, but bonds, particularly government bonds, often perform well as investors seek safe havens. Real estate and commodities like gold also have different risk and return policies, giving you another element of balance.

Diversify portfolios whether economic downturns a bit better. Invest in defensive stocks. Defensive stocks belong to industries that provide essential goods and services, like utilities and healthcare. These companies maintain steady earnings regardless of economic conditions; they're less sensitive to economic cycles because they sell products and services that people will always need. Utilities offer electricity and water, healthcare companies offer medical products and services, and consumer staples include everyday items like food and household products.

These sectors have stable cash flows and dividends, making them attractive during recessions. Companies like Johnson and Johnson and Proctor and Gamble see consistent demand no matter what the economic climate is like. High-quality bonds, government and high-quality corporate bonds, are considered safe investments during recessions because they provide fixed interest payments and have a lower risk of default compared to stocks. They preserve capital.

Bonds are debt securities that pay periodic interest and return the principal at maturity. Government bonds, like the US Treasury bonds, are backed by the government and are considered virtually risk-free. High-quality corporate bonds are issued by financially stable companies with high credit ratings, offering a lower risk of default. During recessions, these bonds provide a predictable income stream. Bond prices often rise when interest rates fall, and interest rates fall during recessions as central banks reduce rates to stimulate growth.

You want to be at the forefront of anything that's going to rise when everything else seems to be falling. Dividend-paying stocks, when the rest of the economy seems unpredictable, you want to turn to the companies that have a long history. This shows resilience and perseverance. Dividend-paying stocks come from more mature companies with strong balance sheets and reliable earnings.

These companies prioritize returning cash to shareholders through dividends, even if the stock price declines during the recession. Dividends provide a source of income. Blue Chip companies like Coca-Cola and Microsoft, which have long histories of paying and increasing dividends, provide stability. The steady income from dividends can help to offset losses from stock price volatility.

These companies are more financially stable and generate consistent cash flow, even if the stock price declines. They have a built-in safety net, so you've got a strategy to catch yourself when everything else falls. They invest in alternative assets. Alternative investments like art, wine, and farmland can appreciate in value independently of stock and bond markets.

These assets have a low correlation with traditional investments, so your portfolio is not only diversified but also stabilized. Historically, art has shown resilience during recessions because collectors and investors are looking for tangible assets. During the 2008 Global Financial Crisis, the overall art market experienced a decline, but the high-end segment, especially Blue Chip artworks by established artists, showed massive resilience. In 2008, Saes and Chis sold a Francis Bacon triptych, setting a record for the artist at the time. Contemporary art also showed strength; artist Damien Hirst orchestrated a direct-to-auction sale at Sotheby’s in September 2008, raising $200 million just as Lehman Brothers collapsed.

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Okay, now back to our video, shall we? Precious metals like gold and silver. Now, the rich do rely on commodities during recessions, but not the unstable ones like copper and oil. Now, gold and silver are going to be your lifeboat when there is a storm. They're considered safe-haven assets because they increase in value during economic uncertainty. Precious metals have intrinsic value; in fact, they've been used as a store of value for centuries.

This is where investors flock to because it protects their wealth from market volatility and inflation. Unlike paper currency, which can be printed in unlimited quantities, gold and silver are finite resources. This scarcity helps to maintain their value. Historically, both of these metals have been used as money and a store of wealth. People trust their stability to hold value over time. The production of gold and silver is limited by the rate at which they can be mined, which constrains supply even when demand rises.

Gold is seen as a hedge against inflation and currency devaluation; its price tends to rise when confidence in fiat currencies and financial markets wanes. Silver, while a bit more volatile than gold, also serves as a hedge and has industrial uses that can support its demand. The rich know that including precious metals in their investment portfolio gives them a buffer against financial market instability.

Cash and cash equivalents— we actually see quite a few young rich people get bitten by this mistake. There was a lot on paper, but they don't have any liquid assets. Take Mike Tyson, for example. He became the youngest heavyweight boxing champion when he was only 20 years old. He earned hundreds of millions of dollars over his career, but back in 2003, he had to declare bankruptcy.

His extravagant spending habits and a lack of sufficient cash reserves meant he couldn't keep up with his debts. He faced legal issues but couldn't pay for his lawyers because he didn't maintain liquidity. You need money market funds and short-term treasury bills to provide liquidity and reduce risk. It offers a safety net for unexpected expenses and reduces the need to sell other investments at a loss.

It also provides the flexibility to take advantage of buying opportunities when asset prices are depressed. Inflation-protected securities. Some securities are there to protect investors from inflation, so we should be using them. Treasury Inflation-Protected Securities, known as TIPS, adjust their principal value based on inflation. TIPS adjust based on changes in the Consumer Price Index, so the purchasing power of the investment is always maintained.

During recessions, inflation may still happen because of monetary policy or supply chain disruption, but when you invest in TIPS, you can safeguard your investments from the eroding effects of this inflation. You also benefit from the security of government backing. TIPS pay interest semiannually at a fixed rate, but this rate is applied to the adjusted principal, so you get an inflation-adjusted return.

To illustrate this a little bit, let's look at a $10,000 investment in TIPS versus the S&P 500 Index during the 2008 and 2009 years. So, in 2008, the TIPS return on investment was 2.35%, and then in 2009, it rebounded with a return of 11.41%. A total return on the $10,000 invested would have been $10,887.78. The S&P 500, on the other hand, lost about 35% of its value in 2008; it recovered in 2009 with a gain of about 26.5%, but the overall loss was still significant.

A total return for that time in the S&P on a $10,000 investment would have been $7,997. TIPS can be a safe and stable investment during economic downturns; it preserves capital and even provides modest growth— a stark contrast to more volatile investments like stocks. Low volatility ETFs— this is also where the rich like to invest. They focus on stocks with lower price fluctuations, so they perform better during market declines.

While the stock market might seem like a bit of a scary place during a recession, if you're cautious with where your money goes, you can still come out on top. You can look at the S&P 500 to see stocks that have shown the lowest volatility over the last year or the last few years; that will help you to determine how they'll hold up during the recession. You'll often see the same companies coming up over and over again, and these are the ones that have been around for a long time or companies that provide essential services.

Nestlé, PepsiCo, or Verizon are amongst these companies, and so are places like Duke Energy, China Mobile, and Atmos Energy. Their prices will fluctuate, but they tend to always come back to stable ground. They invest in consumer staples. No matter what's happening in the world, there are some things we absolutely need to function as a society. Food, beverages, and household items are consumer staples that will stay in consistent demand even if the economy is unstable.

We're always going to need that toilet paper. Consumers will cut back on luxury items, but they can't do that with essential goods, so everyone will continue to buy them. The revenue is stable for companies in this sector, so your investment earnings are more predictable. Another thing we'll always need: healthcare. The healthcare sector is less affected by economic cycles because medical needs are constant.

Investing in healthcare companies can provide stability and growth potential during downturns. Healthcare is a fundamental aspect of our lives—one that doesn't fluctuate with the economy. Whether times are good or bad, people will always need medical attention, medications, and health services. Now, the healthcare sector includes a broad spectrum of industries such as pharmaceuticals, biotechnology, medical devices, and healthcare providers.

A company like Pfizer generates continuous revenue from essential drugs and medical treatments despite the economic climate. The demand for healthcare services and products stays robust in all types of economic conditions, and advancements in medical technology, plus an aging population, presents significant growth opportunities. Innovations in treatments and a need for healthcare services among the elderly pushes the sector to always expand. By investing in healthcare, you tap into an industry that's resilient during recessions and offers long-term growth.

Utilities sector investments—now, this might sound really boring, but look, okay? When boring leads to stability in unstable times, then it's pretty much worth looking into. We always need water, electricity, and gas, and we'll cut back on other things to keep up with the cost of these utilities. Think about the essential services you rely on daily: electricity to power your home, water for drinking and sanitation, and natural gas for heating or cooking. These are the backbone of modern life—indispensable—regardless of whether the economy is booming or in a downturn.

They also operate within a regulated environment, which provides them with predictable revenue streams. This regulatory framework helps to stabilize earnings and cash flows. As we mentioned earlier, utilities are known for paying consistent dividends, providing a steady income even when other investments might falter.

Foreign diversification—we've spoken a lot about diversification here today, and the rich take it a step further by investing in international markets. Some foreign markets might perform well even when the domestic economy is in a recession. Just as traveling broadens your horizons, investing internationally broadens your financial opportunities. When the economy in your home country takes a hit, it doesn't necessarily mean that other parts of the world are facing the same challenges.

By diversifying your investments across various countries and regions, you can reduce the risk associated with economic downturns in your own backyard. Different economies grow and contract at different times, influenced by unique political, social, and economic factors. You should be tapping into growth opportunities worldwide, balancing your portfolio and mitigating the risks of being too concentrated in one market.

Investing internationally also gives you access to emerging markets, which often have higher growth potential compared to developed markets. Real Estate Investment Trusts, or REITs—now, investing in real estate during a recession can be a bit risky, but REITs provide a consistent income because, by law, REITs must distribute at least 90% of their taxable income to shareholders as dividends.

The portfolio is also spread across different sectors like residential, commercial, industrial, and healthcare real estate. While retail properties might face challenges during a recession, industrial properties and healthcare facilities often stay in demand, so the performance of the REIT is balanced. REITs combine the stability of real estate with the liquidity of stocks. You get the benefits of owning income-producing properties without the direct management responsibilities, and you can easily buy and sell REIT shares on the stock market.

And there you have it, Alexir. If your goal is to mitigate your risks and losses, receive a stable income during unstable periods, and maintain liquidity, then these are the strategies you should follow. It's a balancing act, and it's not always going to work out the same, but with the right management and care, you can protect your assets and even grow them during a recession, just like the mega-rich do. [Music]