Worried about a recession? Here’s how to prepare your portfolio
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“We all understand that markets go through cycles and recession is part of the cycle we may face,” said certified financial planner Elliot Herman, partner of PRW Wealth Management in Quincy, Massachusetts.
However, since no one can predict if and when a downturn will occur, it pushes clients to be proactive with asset allocations.
Diversification is key when preparing for a possible economic downturn, said Anthony Watson, CFP and founder and president of Thrive Retirement Specialists in Dearborn, Michigan.
You can eliminate company-specific risk by opting for funds rather than individual stocks because a company is less likely to go bankrupt within a publicly traded fund than 4,000 others, he said.
He suggests checking your mix of growth stocks, which should generally provide above-average returns, and value stocks, typically trading for less than the asset’s value.
“Value stocks tend to outperform growth stocks in a recession,” explained Watson.
International exposure is also important, and many investors don’t use 100% of their domestic assets for stock allocation, he added. While the US Federal Reserve is aggressively fighting inflation, the strategies of other central banks can trigger other growth trajectories.
Since the market interest rates and bond prices generally move in opposite directions, Fed rate hikes caused bond values to plummet. benchmark Honey 10 yearswhich rises when bond prices fall, reached 3.1% on Thursdaythe highest yield since 2018.
But despite the collapse in prices, bonds are still a key part of your portfolio, Watson said. If stocks plummet into a recession, interest rates may also fall, allowing bond prices to pick up, which can offset the stock’s losses.
“Over time, that negative correlation tends to show itself,” he said. “It’s not necessarily day-to-day.”
Advisors also consider duration, which measures the sensitivity of a bond to changes in interest rates based on coupon, time to maturity and the yield paid over the term. Typically, the longer the term of a bond, the more likely it is to be affected by rising interest rates.
“Higher yield bonds with shorter maturities are now attractive and we have kept our fixed income in this area,” added Herman of PRW Wealth Management.
You need to be careful when selling assets and withdrawing, as it could cause long-term damage to your wallet. “This is how you fall prey to the negative sequence of returns, which will eat your retirement alive,” Watson said.
However, retirees can avoid leveraging their nest egg during times of deep losses with a significant cash buffer and access to a home equity line of credit, he added.
Of course, the exact amount needed may depend on monthly expenses and other sources of income, such as social security or a pension.
From 1945 to 2009, the average recession lasted 11 months, according to National Economic Research Office, the official documentary of economic cycles. But there’s no guarantee that a future recession won’t last any longer.
Cash reserves are also important for investors in the “accumulation phase,” with a longer lead time before retirement, said Catherine Valega, CFP and wealth advisor at Green Bee Advisory in Winchester, Massachusetts.
“People really need to make sure they have enough emergency savings,” he said, suggesting 12 to 24 months of spending in savings to prepare for potential layoffs.
“I tend to be more conservative than many because I’ve seen three to six months of emergency spending and I don’t think that’s enough.”
With extra savings, there’s more time to plan your next career move after a job loss, rather than feel the pressure to accept your first job offer to cover your bills.
“If you have enough liquid emergency savings, you are giving yourself more options,” he said.