The current economic climate feels unpredictable, prompting many to seek ways to safeguard their finances.

As inflation rises and a recession looms, having a strategy to protect your money and mental well-being is essential.

Before adjusting your investment portfolio during a recession, it's vital to grasp the concept of a recession and its impact on the stock market. According to financial expert Alec Lucas, Ph.D., Director of Fixed Income Strategies, a recession is officially recognized after two consecutive quarters of declining GDP. This backward-looking metric contrasts with the stock market, which anticipates future conditions.

Since recessions can only be confirmed in hindsight, timing the market is nearly impossible. Fortunately, certain investment avenues have historically performed better during economic downturns. Here are key insights for investors.

Assess Business Models First

When evaluating publicly traded companies, it's crucial to analyze them comprehensively to gauge their ability to endure market challenges.

For instance, consider McDonald's (MCD) versus Starbucks (SBUX). Starbucks manages its locations directly, while McDonald's operates through franchises, selling licenses and leasing property to franchisees.

As Lucas explains, if you were to inquire about opening a McDonald's, you would pay a fee to become a franchisee. This model means franchise owners handle daily operations, while McDonald's corporate manages broader strategies. In contrast, Starbucks is responsible for every aspect of its stores, from inventory to sales. If their products don't sell, the corporation bears the financial burden. This difference often results in McDonald's having higher profit margins than Starbucks.

Lucas has invested in McDonald's stock for his children because of its strong business model, which combines real estate ownership with a franchise model. Just because a brand is ubiquitous doesn't mean it offers equal shareholder value. Always research a company's fundamentals before investing.

Embrace Dividends

Dividend growth funds, which invest in companies providing regular cash dividends, can be a promising option. Lucas recommends funds like VIG or VDIGX. But why focus on dividend funds instead of growth stocks?

Lucas notes that a dividend growth strategy targets companies with the potential for increasing dividends, which typically correlates with rising share prices. Historically, these companies perform well during downturns.

Maintain Diversification

While you may feel compelled to adjust your portfolio during inflationary periods, it's crucial to avoid scrambling for diversification when a recession strikes. Keeping a diversified portfolio at all times protects against losses when the market corrects.

Financial planner Jean Keener, CFP, CRPC, advises against modifying your investment strategy based on economic predictions. Instead, aim for broad diversification in both US and international stocks and bonds, ideally through low-cost index funds. Research shows that small and value companies tend to outperform over time, so including them in your portfolio is wise.

Evaluate Your Personal Situation

In 2022 alone, 24,000 tech workers faced layoffs, and more are expected. As industries fluctuate, now is a good time to assess your career. If you're early in your career and open to change, consider roles that offer stability regardless of economic conditions. If you're in a vulnerable sector and contemplating a career switch, now might be the right moment to act.

Keener suggests that if you're considering adjustments for the upcoming recession, evaluating your career is key. Industries like healthcare, especially in essential medical fields, and education tend to maintain their workforce during downturns. Businesses focusing on essential services typically fare better in recessions.

Ultimately, recession-proofing begins with a personal audit of your life and career. Exploring side gigs in more stable sectors can also be beneficial.