Unexpected layoffs can be much more painful if you do not improve the resilience of your financial portfolio. A job loss can disrupt your financial planning, impede your children’s education, and even cause you to become homeless(if you fail to pay your rent or mortgage payments on time).
Why Do You Need a Portfolio?
Triggered by the life-threatening pandemic followed by a looming recession, layoffs appear unstoppable. No industry was spared layoffs from tech behemoths like Microsoft and Google to media conglomerates like Disney, investment banks like Goldman Sachs, to real estate companies like Anywhere Real Estate.
What matters most in such a situation is how well-prepared you are to deal with an economic meltdown. Proper planning and strategy can create a layoff-proof financial portfolio that can provide better protection as recession warnings sound.
This article will define a layoff-proof financial portfolio and show you how to create one to help you navigate economic storms safely. Just keep reading until the end to find that out.
What is a Financial Portfolio?
A financial portfolio is a collection of financial instruments such as stocks, bonds, commodities, cash, and cash equivalents managed by shareholders or financial experts. A portfolio is built around the investor’s risk tolerance, time frame, and investment goals. The valuation of each asset invested influences the investor’s risk and reward ratio.
Types of Financial Portfolios
Financial Portfolios can be broadly classified into the following categories-
|Portfolio Type||Return Potential||Risk||Volatility||Investment Strategy||Time Horizon|
|Growth or Aggressive Portfolio||High||High-Risk||High||Most investment is in new small-cap companies rather than stable companies with limited room for growth.||Long-term|
|Income Portfolio||Low||Moderate||Moderate||Invested in high dividend-paying stocks that result in long-term capital gain.||Short-Medium|
|Value Portfolio||Moderate||Moderate||Moderate||Focused on high-potential, low-priced, and undervalued stocks. You buy and hold these stocks for an extended period to sell later when the price rises.||Long-term|
|Defensive Portfolio||Low||Low||Low||Investment is concentrated primarily in sectors or industries whose products are in high demand regardless of the economic situation.||Long-term|
|Balanced Portfolio||Low||Low||Low||The investment is made in income-generating, moderate-growth stocks with a more significant portion of bonds.||Mid-to-Long term|
How to Build A Layoff-Proof Financial Portfolio?
Layoffs are mentally, socially, psychologically, and emotionally painful and even get traumatic when you see your loved ones suffering. In addition, after losing your regular income, paying your bills, rent, home loan instalments, medical insurance, and term insurance gets extremely difficult, leading to long-term financial insecurity.
You can follow the following tips to build a well-planned financial portfolio-
- Build an Emergency Fund
Emergency funds in a financial portfolio are dedicated to managing your survival needs, such as house rent, grocery expenses, electricity bills, EMIs, education fees, mobile tariffs, etc.
Assess your risk concerning your industry before starting your financial portfolio. For example, if you work for a less vulnerable company to downsizing or mass layoffs, save three to six months’ salary in an emergency fund. If the industry you work in is more prone to suffering revenue losses during a recession, then try saving at least 8-12 months’ salary.
While planning emergency funds for your financial portfolio, keep two things in mind- Volatility and Liquidity. Always focus on investment avenues that are highly liquid with no lock-in period so that they can be quickly redeemed when required. Further, the investment strategy must be conservative rather than aggressive, which entails a much higher risk of losses.
- Dollar-Cost Averaging
You can significantly reduce your average cost per share and the impact of volatility by implementing a dollar-cost averaging strategy in your financial portfolio. This strategy eliminates the need to monitor the markets for a possible dip to purchase the target security at the best price.
You can automatically invest a fixed sum at regular intervals, regardless of the financial instrument’s price, to build wealth over time without jeopardizing your financial portfolio through impulsive buying and selling securities. When you are laid off, and the sky appears to be falling on you, this corpus built over time by accumulating small systematic instalments is a reliever.
- Build a Defensive Portfolio
Choosing the right investment vehicle is one of the most crucial steps in building a financial portfolio. With plenty of options, not getting bogged down as an investor is imperative. Recession is one of the primary attributes of layoffs, and public stock markets predominately show negative sentiment as recession fear grips the market.
So, while building your financial portfolio, set aside some defensive investments for capital protection, your basic need in the event of a layoff. Defensive stocks focus on sectors/industries that historically outperform during recessions, like healthy large-cap stocks, Healthcare, Pharma, Consumer Staples, or Utilities.
Diversification is a tool used to reduce investment risks during a downturn while capitalizing on the upside as the economy recovers. Every successful investor advises us to diversify our financial portfolio, but only a few understand the true implications.
Diversification entails investing in different stocks or mutual funds and spreading your money across various asset classes. It provides you with higher and more consistent returns because if one stock/industry underperforms, the other stock/industry may outperform, neutralizing the losses suffered. So, when it comes to investment options for diversification, choose wisely.
- Passive income Streams
One of the most effective ways to weather layoffs during economic downturns is to generate passive income. For example, if you own a property, rent it out to generate rental income. Passive income gives your financial portfolio the confidence of predictable cash flows and ditches the struggling days with no regular income.
When your active income evaporates during a layoff crisis, passive income can do wonders if done correctly. You can create and sell products and services that require little to no effort and generate revenue with minimal risk.
- Insurance Policy
When building your financial portfolio, insurance is the most underutilized tool. Most rely solely on our employers’ health and life insurance coverage. However, you may be in trouble if you are laid off and do not have the safety net of employee benefits.
So, when planning your financial portfolio, aim for health coverage of at least 50-100% of your annual salary to cover medical needs for you and your family. In addition, you can keep a separate savings account in which you save enough money to cover at least six months’ worth of vital insurance premiums such as health, endowment, or term insurance.
If not laid off yourself, seeing global layoffs at such significant levels may be equally dreadful, creating havoc in both professional and personal lives. The reasons for motivating such bulk dismissals are plenty- rising interest rates, record-breaking inflation, inverted yield curve, impending recession, low profitability, and many more. Of course, the macroeconomic and geopolitical factors are beyond our control, but we can still stay confident by building a layoff-proof financial portfolio.
The most challenging aspects of being laid off are managing household expenses and paying off loan instalments. However, you can easily survive a job loss or salary cut if you try not to strain your resources, scrutinize your budget, eliminate non-essential expenses, maintain an adequate emergency fund, and consider investing at least 20-30% in non-market-based schemes as per your risk appetite.
What to do if I lose my job and have no money either?
This situation is concerning and highlights the need for financial portfolios even more. You can avail of unemployment benefits like the Rajiv Gandhi Shramik Kalyan Yojna (RGSKY) and Atal Beemit Vyakti Kalyan Yojna (ABVKY) policies under ESIC (Employee State Insurance Corporation) to be applied within 90 days of job loss. You can also opt for unemployment insurance from other private players as well.
How to generate regular income after a job loss?
You can either upskill yourself or use your new knowledge to generate passive income. You can also keep your emergency funds in a fixed deposit rather than a savings account. In addition, if necessary, withdraw monthly interest as a source of regular income. While building your financial portfolio, you can also invest in stocks with high dividend yields.