By Richard Hartung

Even though the Singapore economy narrowly avoided a recession this year, with economic growth improving from -2.7% in the second quarter to 0.6% in the third quarter, growth has slowed. And the US is slowing too, as growth declined from 4.2% in the second quarter last year to 2.0% this year.

Stock markets have stalled as well. After soaring by double digits earlier in the year, US stocks rose by just 1% in the third quarter. And after dipping by 5.9% in August, the Singapore market rose a tiny 0.4% in September. “Recession red flags are weighing on the stock market,” CNBC describes it, and a setback is possible.

Investors are especially concerned about the US-China trade war and the inversion in the US yield curve in August, which has been a reliable indicator of recessions.

How to Respond

While recessions are not unusual, investment advisory The Motley Fool notes they can be long-lasting and may cause permanent financial damage to people who aren’t prepared.

An essential principle for mitigating the risk of a slowdown or recession and reducing volatility in your investments is to diversify into different sectors, such as stocks, bonds and real estate. The primary goal of that diversification, investment adviser Fidelity explains, is to limit the impact as stock or bond markets rise and fall rather than to maximize returns or guarantee against a loss.

If stock or bond markets do drop, financial management firm Vanguard suggests focusing on saving more, spending less and controlling investment costs so that you are ready to buy when shares hit a low, so you can take advantage of an upturn.

What investors should not do, the Motley Fool advises, is to panic and sell low if there’s a big market drop. Even though stock prices have fallen by as much as 30% in recent recessions, large drops are normal. By holding on to strong investments that are likely facing short-term losses, rather than selling them, investors can avoid the mistake of selling at the worst time and missing out on the market’s recovery. Write out a downturn plan and stick to it, portfolio management company Betterment advises.

The Right Portfolio

There are several options you can choose from to diversify your portfolio and reduce the downside risk of a further slowdown, and then take advantage of the upside.

If you are not a sophisticated investor, you can put a set amount every month into exchange-traded funds (ETFs) that follow market indices in several sectors. The Nikko AM STI ETF includes stocks in the companies in the Straits Times Index, for instance, while the Nikko AM SGD Investment Grade Corporate Bond ETF gives you a diversified bond portfolio. By investing consistently, you can average out your costs. There are ETFs in the US that similarly follow the S&P 500 or various bond indices. The advantage of ETFs, Vanguard says, is that they offer “a simple and low-cost way to diversify a portfolio across asset classes, investment strategies and geographic regions.” You may want to put a higher percentage of your investment than usual into bonds, as they tend to be more stable when markets drop.

Alternatively, you could use a robo-advisor, such as Stashaway or Kristal.ai. Once you input information about your tolerance for risk, goals and time horizon, the robo-advisor will select appropriate ETFs for investments and rebalance your assets occasionally to keep them diversified. While the value of assets may still drop in a recession, robo-advisors are usually designed to adjust the portfolio and be more defensive in the face of a potential downturn.

If you’re more knowledgeable, you can select individual stocks, bonds and real estate investment trusts (Reits) that match your profile and diversify your portfolio, perhaps being more conservative than usual given the market uncertainty.

If a market crash does happen, consider taking advantage of lower costs and using your savings to pick up good assets at low prices. While there are still risks, many investors who have bought shares when prices plunged in past downturns and held them as markets recovered have achieved good results.

While what will actually happen with investments is uncertain, preparing for a slowdown can position your investment portfolio well for a better financial future.