Will Your Portfolio Pass the Recession Test? 5 Red Flags to Check Today

The economy, like the weather on the Florida coast, can change rapidly. A clear sky can turn stormy in a matter of hours, and the same is true for the markets. While no one can predict with certainty when the next recession will strike, we can prepare for it wisely. The big question is: Is your portfolio really prepared to withstand a recession?

As a Fee-Only Financial Advisor and CFP® in Palm Beach, I’ve seen many investors discover too late that their portfolios weren’t as strong as they thought. That’s why today I want to help you identify five warning signs that could put your finances at risk in an adverse economic environment.

1. High Concentration in Cyclical Sectors

If your portfolio is loaded with stocks from sectors like consumer discretionary, real estate, speculative technology, or luxury companies, it’s time to review.

Cyclical sectors tend to suffer during recessions because they depend on consumer spending and economic growth. When the economy slows, these companies typically see their revenues and, consequently, their stock prices fall.
What can you do?

Evaluate your portfolio’s diversification. Consider rebalancing toward more defensive sectors like healthcare, utilities, or consumer staples. It’s not about timing the market, but about building resilience.

2. Low Liquidity

In times of economic uncertainty, having quick access to cash isn’t a luxury; it’s a necessity. If most of your investments are tied up in illiquid assets—such as real estate, private businesses, or alternative investments—you could find yourself in an awkward situation if you need liquidity urgently.

Warning sign: If you don’t have at least three to six months of expenses in an accessible account, your portfolio could be at risk.

Practical advice: Create or strengthen your emergency fund. Also, assess whether part of your portfolio needs greater flexibility to respond to unexpected needs without having to sell assets at a loss.

3. Excessive Exposure to High Yield Debt

High-yield bonds (also known as “junk bonds”) may seem attractive because of their rates, especially in times of low traditional yields. But in a recession, companies with low credit ratings are the first to face problems.

The risk: These companies can default, which could translate into significant losses for your portfolio.

Recommendation: Evaluate the credit quality of your fixed-income assets. Is there a balance between yield and security? A conservative approach can better protect your capital when times get tough.

4. Dependence on Variable Income or Investments for Daily Expenses

This point is especially relevant for those who are already retired or close to retirement.

If you’re relying on your investments to cover your monthly expenses and the market suffers a significant decline, you may be forced to sell losing assets to generate income.

What to do?

Implement a “retirement with reserves” strategy: keep at least one or two years of planned expenses in low-risk, highly liquid instruments. This way, you’ll avoid selling stocks during times of low valuation.

5. Lack of a Clear and Documented Investment Strategy

If your portfolio was built based on scattered advice, internet articles, or recommendations from friends, it likely lacks strategic cohesion. In times of growth, this lack of structure may go unnoticed, but during a recession, weaknesses quickly emerge.

The danger: Without a defined strategy, you could make impulsive decisions in a panic—an investor’s worst enemy.

Solution:

Make sure you have an investment plan aligned with your personal goals, risk tolerance, and time horizon. This document should be your roadmap during the most volatile times.

Now What?

These warning signs aren’t meant to scare you, but rather to push you to take control of your financial future. The good news is that it’s never too late to strengthen your portfolio. In fact, the best times to prepare for a storm are on sunny days.

If, after reading this, you’ve realized that your portfolio might not be prepared for a recession, you’re not alone. Many of the professionals, families, and retirees I work with here in Palm Beach faced these same challenges before taking the step of working with an advisor.

As a CFP® and Fee-Only Financial Advisor, I don’t sell financial products or charge commissions. My sole interest is helping you build a clear, personalized, and resilient strategy. I work hourly or under financial planning agreements, whichever works best for you.

Ready to Evaluate Your Portfolio Objectively?

An objective review of your financial situation can make a significant difference. If you’d like to discuss how to prepare your portfolio for the next economic cycle—whenever it may come—I invite you to schedule a no-obligation meeting.
Financial peace of mind isn’t achieved by accident. It’s built with intention, knowledge, and professional guidance.

📍 I’m located in Palm Beach, available for virtual or in-person meetings.

💼 Would your portfolio pass the recession test? Let’s do that review together.