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“We all understand that markets go through cycles, and a recession is part of a cycle we may face,” said certified financial planner Elliott Herman, partner at PRW Wealth Management in Quincy, Massachusetts.
However, since no one can predict when and when a recession will occur, it encourages customers to be proactive in asset allocation.
Diversification is crucial in preparing for a possible economic recession, said Anthony Watson, CFP and founder and president of Thrive Retirement Specialists in Dearborn, Michigan.
You can eliminate a certain company risk by choosing funds rather than individual stocks because you are less likely to feel that the company will go bankrupt in an exchange-traded fund with 4,000 others, he said.
It offers to test your combination of growth stocks, which tend to provide above-average returns, and the stock price is usually traded less than the value of the asset.
“The value of stocks tends to outpace the rise of stocks that fall into recession,” Watson explained.
International exposure is also important, and many investors default to 100% of domestic assets to place shares, he added. While the U.S. Federal Reserve is aggressively battling inflation, other central bank strategies may trigger other growth trajectories.
Because market interest rates and bond prices are common move in opposite directions, the Fed’s rate hike has reduced bond prices. The standard 10-year treasuryrising when bond prices fall, on Thursday reached 3.1%.the highest yield since 2018.
But despite falling prices, bonds are still a key part of your portfolio, Watson said. If stocks fall sharply into recession, interest rates may also fall, allowing bond prices to recover, which could offset stock losses.
“Over time, this negative correlation tends to manifest itself,” he said. “It’s not necessarily day-to-day.”
Advisors also consider the duration, which measures the sensitivity of a bond to changes in coupon-based interest rates, the time to maturity, and the yield paid over the term. As a rule, the longer the duration of the bond, the more likely it is to be affected by rising interest rates.
“More yielding bonds with shorter maturities are now attractive, and we have maintained fixed returns in this area,” added Herman of PRW Wealth Management.
Against the background of high inflation and low profitability of savings accounts to keep cash has become less attractive. However, retirees still need a cash buffer to avoid what is known as the risk of “sequence return”..
You need to pay attention when you sell assets and accept withdrawals, as this can cause long-term damage to your portfolio. “So you fall victim to a negative income sequence that eats your pension alive,” Watson said.
However, retirees can avoid eavesdropping on their nest during periods of deep losses with a significant cash buffer and access to an 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 documentary of economic cycles. But there is no guarantee that the future recession will not last.
Cash reserves are also important for investors in the “accumulation phase,” with a longer pre-retirement period, said Catherine Valega, CFP and Green Bee Advisory consultant in Winchester, Massachusetts.
“People really need to make sure they have enough emergency savings,” she said, suggesting savings costs of 12 to 24 months to prepare for potential layoffs.
“I’m usually more conservative than many because I’ve seen three to six months of emergency spending, and I don’t think that’s enough.”
Thanks to the extra savings, you’ll have more time to work out a strategy for your next career step after losing a job than to feel pressured to accept your first job offer to cover your bills.
“If you have enough liquid emergency savings, you provide yourself with more options,” she said.