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

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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, he pushes clients to be proactive with asset allocation.

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 eliminate company-specific risk by selecting funds instead of picking individual stocks because you’re less likely to feel a company bankrupt in an exchange-traded fund of 4,000 other people, he said.

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

Bond allocation

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, hit 3.1% on Thursdayhighest output since 2018.

But 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 stock losses.

“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 offer, 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.

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

Cash reserve

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 be careful when selling assets and withdrawing money, as it can cause long-term harm to your portfolio. “That’s how you fall prey to a string of negative returns that will devour you in retirement,” says Watson.

However, retirees can avoid mining their nests during periods of deep loss with a substantial amount of cash 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 Bureau of Economic Research, the official document on economic cycles. But there is no guarantee that the future downturn will be gone.

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

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 cautious than a lot of people because I’ve had three to six months of emergency expenses and 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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