Worried about a recession? Here’s how to prepare your portfolio

Read Time:3 Minute, 45 Second


FG Trade | iStock | Getty Images

More from FA Playbook:

Here’s a look at other stories impacting the financial advisor business.

“We all understand that markets go through cycles and recession is part of the cycle that we may be facing,” said certified financial planner Elliot Herman, partner at PRW Wealth Management in Quincy, Massachusetts.

However, since no one can predict if and when a downturn will occur, he pushes for clients to be proactive with asset allocations.

Diversify your portfolio

Diversification is critical when preparing for a possible economic recession, said Anthony Watson, a 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 you’re less likely to feel a company going bankrupt within an exchange-traded fund of 4,000 others, he said.

Value stocks tend to outperform growth stocks going into a recession.

Anthony Watson

Founder and president of Thrive Retirement Specialists

He suggests checking your mix of growth stocks, which are generally expected to provide above-average returns, and value stocks, typically trading for less than the asset is worth.

“Value stocks tend to outperform growth stocks going into a recession,” Watson explained.

International exposure is also important, and many investors default to 100% domestic assets for stock allocations, he added. While the US Federal Reserve is aggressively fighting inflation, strategies from other central banks may trigger other growth trajectories.

Bond allocations

Since market interest rates and bond prices typically move in opposite directions, the Fed’s rate hikes have sunk bond values. The benchmark 10-year Treasury, which rises when bond prices fall, reached 3.1% on Thursday, the highest yield since 2018.

But despite slumping prices, bonds are still a key part of your portfolio, Watson said. If stocks plummet heading into a recession, interest rates may also decrease, allowing bond prices to recover, which can offset stock 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 a bond’s sensitivity to interest rate changes based on the coupon, time to maturity and yield paid through the term. Generally, the longer a bond’s duration, the more likely it may be affected by rising interest rates.

“Higher-yielding bonds with shorter maturities are attractive now, and we have kept our fixed income in this area,” Herman from PRW Wealth Management added.

Cash reserves

Amid high inflation and low savings account yields, it’s become less attractive to hold cash. However, retirees still need a cash buffer to avoid what’s known as the “sequence of returns” risk.

You need to pay attention to when you’re selling assets and taking withdrawals, as it may cause long-term harm to your portfolio. “That is how you fall prey to the negative sequence of returns, which will eat your retirement alive,” Watson said.

However, retirees may avoid tapping their nest egg during periods 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 the National Bureau of Economic Research, the official documenter of economic cycles. But there’s no guarantee a future downturn won’t be longer.

Cash reserves are also important for investors in the “accumulation phase,” with a longer timeline before retirement, said Catherine Valega, a CFP and wealth consultant at Green Bee Advisory in Winchester, Massachusetts.

I do tend to be more conservative than than many because I have seen three to six months in emergency expenses, and I don’t think that’s enough.

Catherine Valega

Wealth consultant at Green Bee Advisory

“People really need to make sure that they have sufficient emergency savings,” she said, suggesting 12 months to 24 months of expenses in savings to prepare for potential layoffs.

“I do tend to be more conservative than many because I have seen three to six months in emergency expenses, and I don’t think that’s enough.”

With extra savings, there’s more time to strategize your next career move after a job loss, rather than feeling pressure to accept your first job offer to cover the bills.

“If you have enough in liquid emergency savings, you are providing yourself with more options,” she said.


If you want to know more about business please go to https://updatednews24.com/category/business/

Happy
Happy
0 %
Sad
Sad
0 %
Excited
Excited
0 %
Sleepy
Sleepy
0 %
Angry
Angry
0 %
Surprise
Surprise
0 %
We use cookies to personalise content and ads, to provide social media features and to analyse our traffic. We also share information about your use of our site with our social media, advertising and analytics partners. View more
Cookies settings
Accept
Privacy & Cookie policy
Privacy & Cookies policy
Cookie name Active

Who we are

Suggested text: Our website address is: https://updatednews24.com.

Comments

Suggested text: When visitors leave comments on the site we collect the data shown in the comments form, and also the visitor’s IP address and browser user agent string to help spam detection. An anonymized string created from your email address (also called a hash) may be provided to the Gravatar service to see if you are using it. The Gravatar service privacy policy is available here: https://automattic.com/privacy/. After approval of your comment, your profile picture is visible to the public in the context of your comment.

Media

Suggested text: If you upload images to the website, you should avoid uploading images with embedded location data (EXIF GPS) included. Visitors to the website can download and extract any location data from images on the website.

Cookies

Suggested text: If you leave a comment on our site you may opt-in to saving your name, email address and website in cookies. These are for your convenience so that you do not have to fill in your details again when you leave another comment. These cookies will last for one year. If you visit our login page, we will set a temporary cookie to determine if your browser accepts cookies. This cookie contains no personal data and is discarded when you close your browser. When you log in, we will also set up several cookies to save your login information and your screen display choices. Login cookies last for two days, and screen options cookies last for a year. If you select "Remember Me", your login will persist for two weeks. If you log out of your account, the login cookies will be removed. If you edit or publish an article, an additional cookie will be saved in your browser. This cookie includes no personal data and simply indicates the post ID of the article you just edited. It expires after 1 day.

Embedded content from other websites

Suggested text: Articles on this site may include embedded content (e.g. videos, images, articles, etc.). Embedded content from other websites behaves in the exact same way as if the visitor has visited the other website. These websites may collect data about you, use cookies, embed additional third-party tracking, and monitor your interaction with that embedded content, including tracking your interaction with the embedded content if you have an account and are logged in to that website.

Who we share your data with

Suggested text: If you request a password reset, your IP address will be included in the reset email.

How long we retain your data

Suggested text: If you leave a comment, the comment and its metadata are retained indefinitely. This is so we can recognize and approve any follow-up comments automatically instead of holding them in a moderation queue. For users that register on our website (if any), we also store the personal information they provide in their user profile. All users can see, edit, or delete their personal information at any time (except they cannot change their username). Website administrators can also see and edit that information.

What rights you have over your data

Suggested text: If you have an account on this site, or have left comments, you can request to receive an exported file of the personal data we hold about you, including any data you have provided to us. You can also request that we erase any personal data we hold about you. This does not include any data we are obliged to keep for administrative, legal, or security purposes.

Where we send your data

Suggested text: Visitor comments may be checked through an automated spam detection service.
Save settings
Cookies settings