How to build a portfolio in your 30s and 40s to lower your recession risk

• Recessions are a normal part of the economic cycle.
• Diversifying your portfolio can help protect against losing too much money in a recession.
• In your 30s and 40s, consider diversifying through cyclical, countercyclical, and neutral assets like gold.

No one knows exactly when the next recession is coming. However, you can be confident one will show up eventually.

"A recession isn't really when things go wrong," Rosa Chen, director of research and portfolio manager at Bradley, Foster & Sargent, tells Business Insider. "It's just the normal economic cycle."

That's why experts recommend diversifying your retirement portfolio with different types of assets to reduce volatility and soften the blow when the inevitable dip comes.

Below, we asked experts how to build a diversified portfolio that will last for decades — and recessions.

Consider how much risk you can take

If you're in your 30s or 40s, you have some time before you need to actively use your savings. "Thirties to 40s isn't even middle age anymore, right?" says Julia Cartwright, senior research fellow in law and economics at the American Institute for Economic Research. "These folks can afford to take on a lot more volatility."

Cartwright uses stocks and bonds as an example. Stocks can generate a return of 10% or 11% per year over time, but some years, such as during a recession, the stock market will crash, and you'll lose some of the money you put into it.

In comparison, bonds are generally less risky, but they don't generate as high a rate of return.

"Would I recommend somebody who is in their 30s or 40s putting a big percentage of their portfolio in bonds? No," Cartwright says. "Why? Because then they're not able to capture that potential 10% to 11% — or even greater."

But a diversified portfolio is still important if you're in your 30s and 40s, which could mean you purchase a small group of bonds for economic protection.

"We're not trying to generate this massive return. We're just trying to make sure that, if the market's going up and down a lot, the bonds keep that portfolio a little bit more even," Chen says.

Diversify with cyclical and countercyclical assets

If you want to ensure your assets perform well during economic downturns, you need to build a portfolio that isn't just reliant on a booming economy.

"It's important for it to be both cyclical — meaning it goes up when the macro market is good and goes down when the macro market is bad — and countercyclical, meaning part of your portfolio goes up when the market is bad," Cartwright says.

You're likely already diversified with cyclical assets. The S&P 500, for example, is generally considered cyclical.

In comparison, countercyclical assets are things that perform well during recessions, when people can't afford to make the financial decisions they do during market upturns.

"A classic example of a countercyclical asset would be investing in lower income housing, for example," Cartwright says. "That's going to be in high demand when folks are feeling really tightened in their belts."

Add neutral assets to your portfolio

Then there are neutral assets, like gold, which don't count as either cyclical or countercyclical. That means it can be most useful beyond a recession, when your portfolio needs further protection.

"Gold typically is a safe haven when things go wrong," Chen says. She continues that gold is useful as a long-term hedge in case fiat currency like the US dollar isn't performing as well.

She lays out a hypothetical scenario: "We enter a huge conflict and no one wants the dollar anymore because they hate us, so they start transacting in gold. No one wants to buy our bonds anymore, so now gold is a way to transact. There's huge inflation; we don't trust the dollar anymore. Let's use gold to transact."

Gold is useful as a hedge against fiat currency because it's inherently limited. There's not an easy way for governments to make more gold like they can with their own currency.

That being said, gold can be volatile like any other asset — if you're looking for a short-term asset, it might not be the right choice for you.

How gold can be purchased through an IRA

There are several different ways to diversify with gold, and for many people, owning physical gold outright is part of the draw of precious metals.

"Physical gold is great because you can take it with you," Chen says. You own the gold — it's yours to keep.

If you want to buy gold as part of a retirement plan, you might consider a gold IRA. Gold IRAs can be complicated, but it's the only way to buy physical gold in a tax-advantaged retirement account for the future.

You can't open a gold IRA at your bank. You'll need to go through a precious metals dealer like Goldco, which offers self-directed gold IRA retirement plans. You can transfer or roll over existing retirement funds from another account into a gold IRA, where they will continue to be tax-advantaged.

Because you're buying physical gold, expect a different process than your other IRAs. When you buy (and sell) the gold, expect to pay some fees. You should also expect a standard annual fee for storage. The IRS does not allow you to store gold in a retirement account at home, so a trusted third-party company will hold it instead.

Different companies charge different commissions and storage fees. Any reputable dealer will make its fee structure clear from the beginning; make sure you fully understand what fees are associated with the account you open before you commit.

As long as your portfolio is diversified, you'll be in a good place to weather whatever economic conditions come your way — especially while you're still young.

Created by the Commerce team at Business Insider with Goldco.

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