How to Build a Recession-Proof Stock Portfolio

Investing during a recession can be challenging, but with the right strategies, you can protect your investments and even find opportunities to grow your wealth. A recession-proof stock portfolio focuses on companies that remain stable and perform well even when the economy is struggling. This guide will show you how to build such a portfolio using Financial Modeling Prep (FMP) API endpoints to gather essential data.

1. Understand What Makes a Stock Recession-Proof

Recession-proof stocks are typically from industries that provide essential goods and services, which people need regardless of economic conditions. These include:

- Utilities. Companies that provide electricity, water, and gas.

- Healthcare. Firms that offer medical services, pharmaceuticals, and health products.

- Consumer Staples. Businesses that produce everyday items like food, beverages, and household goods.

- Telecommunications. Companies that offer phone and internet services.

2. Select the Right Sectors

Start by choosing sectors that are less affected by economic downturns. Use the FMP Sector Historical API endpoint to see how different sectors are performing. This helps you identify which sectors are stable during a recession. When you use this API endpoint, you can indicate a date range to check how certain sectors behaved during economic declines and pick sectors that were resistant to economic conditions.

3. Choose Strong, Stable Companies

Look for companies with strong financials, consistent earnings, and low debt. To do this, you need to examine the company's financial statements. I've written the article “How to Perform Financial Statement Analysis to Identify Great Stocks” that will help you in analyzing financial statements and identifying great shares.

4. Analyze Key Financial Ratios

Financial ratios help you understand a company's financial health. It's important to analyze a wide range of ratios, not only basic ratios such as P/E, P/B, P/S, to have a better picture of how your selected company performs in comparison to its closest peers and whether companies' stocks are undervalued or not. To analyze financial ratios correctly and also choose ratios tailored to a company's business, read “A Quick Guide to Financial Ratio Analysis”.

5. Focus on Dividend-Paying Stocks

Companies that pay dividends can provide a steady income stream, which is valuable during a recession. Use the FMP Dividends Historical API endpoint to check if your selected company is paying dividends and see its ability to sustain dividends. Also check the Cashflow Statements API endpoint.

What to Look For?

- Positive Free Cash Flow (from CashFlow Statements API). Indicates the company can maintain or increase dividends.

- Consistent Dividend Payments. Shows reliability in returning profits to shareholders.

6. Diversify Your Portfolio

Diversification reduces risk by spreading investments across different sectors and companies. Use the FMP Screener API endpoint to filter stocks based on market cap, liquidity, and volatility. You want to choose less volatile stocks (with smaller Beta) and larger companies (with larger market cap) because they tend to be more predictable and have stronger support from larger institutional volumes, actively traded stocks. Also, pay attention to the sector in the screener. Remember we've selected the right sector from step #2. Now put your selected sectors inside the screener to fetch stocks based on that particular sector, to make sure you are picking recession resistent stocks. There are also popular portfolio management models to build an efficient investment portfolio. For example, the Markowitz model helps you allocate asset weights in your portfolio in such a way as to minimize your portfolio loss, given your required return.

7. Monitor Economic Indicators

Stay informed about economic trends that could impact your portfolio. Use FMP Economics Calendar API endpoint to keep track of important economic data like GDP growth, unemployment rates, and inflation.

8. Regularly Review and Rebalance Your Portfolio

Your investment portfolio needs to be rebalanced because of many reasons. Sometimes economic conditions change, the economy starts booming, and you want to choose growth stocks (Examine step #7). Sometimes stocks are not meeting your required return or becoming too volatile, and you want to change their proportions in the portfolio. Sometimes company fundamentals change, and you want to pick other stocks that look better from the fundamental standpoint. You need to examine your portfolio stocks regularly to monitor changes in financials and stock prices.

Building a recession-proof stock portfolio involves selecting stable sectors, choosing financially strong companies, focusing on dividends, and diversifying your investments. By leveraging Financial Modeling Prep's API endpoints, you can access the data needed to make informed decisions and protect your investments during economic downturns. Regular monitoring and rebalancing will help ensure your portfolio remains resilient and poised for long-term success.