Some experts say a recession is coming. How to prepare your portfolio

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Months of stock market volatility, rising inflation and rising interest rates have left many investors wondering if a recession is imminent.

The stock market fell again on Thursday, with S&P 500 its limit worst six-month start to a year since 1970. As of now, it is down more than 20% year-over-year. The Dow Jones Industrial Average and Nasdaq Composite also decreased significantly since the beginning of 2022, by more than 15% and nearly 30% respectively.

Meanwhile, consumer sentiment about the economy has plummeted, according to close research from the University of Michigan Consumer surveymeasures a 14.4% drop in June and a record low for the report.

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About 68% of CFOs predict a recession in the first half of 2023, according to CNBC’s CFO Survey. However, expert forecasts differ on possibility of economic recession.

Certified financial planner Elliot Herman, partner at PRW Wealth Management in Quincy, Massachusetts, said: “We all understand that markets go through cycles, and downturns are part of the cycles we live in. we may have to face.

However, since no one can predict whether a recession will occur, Herman encourages clients to be proactive and make sure their portfolios are ready.

Diversify your portfolio

Anthony Watson, a CFP, founder and president of Thrive Retirement Specialists in Dearborn, Michigan, says diversification is crucial when preparing for a possible recession.

You can reduce the risk for a particular company by selecting funds rather than picking individual stocks because you are less likely to feel a company bust in an exchange-traded fund of 4,000 other people, he said. .

Value stocks tend to outperform growth stocks that are going into recession.

Anthony Watson

Founder and President of Thrive Retirement Specialists

He suggests examining a combination of growth stocks, which are generally expected to deliver above-average returns, and stock valuations, which often trade for less than value. of property.

“Value stocks tend to outperform growth stocks that are going into recession,” explains Watson.

International exposure is also important, and many investors default to using 100% of their domestic assets to allocate shares, he added. While the US Federal Reserve is aggressively fighting inflation, strategies from other central banks could trigger other growth trajectories.

Double-check bond allocations

Because market interest rates and bond prices are often move in the opposite direction, the Fed’s interest rate hikes have reduced the value of bonds. Exact score 10 year treasuryincreases when bond prices fall, topped 3.48% on June 14highest output in 11 years.

Despite falling prices, bonds are still an important part of your portfolio, says Watson. If stocks plummeted into a recession, interest rates could also fall, allowing bond prices to recover, which could offset a stock’s loss.

“Over time, that negative correlation tends to reveal itself,” he said. “It doesn’t have to be a day or two.”

Advisors also look at maturity, which measures a bond’s sensitivity to interest rate changes based on its coupon, time to maturity, and yield paid over maturity. In general, the longer the maturity of a bond, the more likely it is to be affected by rising interest rates.

Herman from PRW Wealth Management added: “Higher yield bonds with shorter maturities are attractive and we have kept our fixed income in the sector.”

Cash Reserve Review

In the face of high inflation and low savings account yields, holding cash becomes less attractive. However, retirees still need a cash buffer to avoid what is called risk “chain of profits”.

You need to pay attention to the timing of asset sales and withdrawals, as it can cause long-term harm to your portfolio. “That’s how you fall prey to the negative returns that will devour your retirement,” says Watson at Thrive Retirement Specialists.

However, retirees can avoid tapping their nests during periods of deep losses with a substantial amount of cash and access to a home-buying 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 Bureau of Economic Research, the official document on economic cycles. But there is no guarantee that the future downturn will be gone.

Catherine Valega, a financial advisor and CFP at Green Bee Advisory in Winchester, Massachusetts, said cash reserves are also important for investors during the “accumulation phase,” with a longer period before retirement.

I tend to be more cautious than many people because I’ve had three to six months of emergency expenses, and I don’t think that’s enough.

Catherine Valega

Wealth Advisor at Green Bee Advisory

“People really need to make sure they have enough emergency savings,” she says, suggesting 12 to 24 months of savings to prepare for the possibility of layoffs.

“I actually tend to be more conservative than a lot of people,” she said, noting the more widely advertised suggestion of costing three to six months. “I don’t think that’s enough.”

With the extra savings, you’ll have more time to strategize for your next career move after losing your job, rather than feeling the pressure of accepting your first job offer to cover your expenses. bills.

“If you have enough savings in case of an emergency, you are providing yourself with more options,” she says.

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