Shelter From the Storm

With talk of recession flooding the markets, what can the average investor do? First, don't panic. Beyond that, here are some tips:

Focus on staples. People buy household products and healthcare regardless of how much they're hurting financially, says Christine Benz, director of mutual fund analysis at Morningstar. That means companies such as Procter & Gamble, Kellogg, General Mills, and Johnson & Johnson are still good stocks to own. "Those are areas traditionally thought to be recessionproof," she says. Companies responsible for discretionary items, such as Ford or GM, are more vulnerable.

Benz also suggests focusing on larger companies with more diverse product lines because they will be more insulated from market swings. In the recessionary year 1990, for example, the Russell 2000 Index, which is composed of small-cap stocks, lost 20 percent, compared with the S&P 500, which lost only 6.6 percent.

Shift into bonds. "Money markets and short-duration bonds do very well in bad capital markets," says Fran Kinniry, principal in Vanguard's investing counseling and research department. Vanguard's Prime Money Market Fund is yielding 5.10 percent. But if the Federal Reserve cuts interest rates, stocks could rally.

Take home cash. "Think about building your personal reserves in case you are to lose your own job," advises Benz. Savings accounts or money market funds are safe places to store money. While you won't benefit from any upswing in the markets, Benz suggests tucking away at least three to six months of living expenses.

Hold tight. If you own a diversified portfolio, only slight adjustments may be needed, says Brad Sorensen, director of sector analysis at Charles Schwab. Moving too much into safe harbors could mean losing out on unexpected gains. "If the Fed comes in and aggressively cuts rates, we could have a huge rally," he says.