With stocks plummeting and interest rates rising, many investors expect a recession in the near future. So how can you prepare your portfolio for a possible downturn?
Bankrate’s Second-Quarter Market Mavens survey asked professional investors what you should do to protect your money and how to invest in the event that a recession does come to pass.
The stock market has been in a serious downturn this year, with major indexes such as the Standard & Poor’s 500 falling more than 20 percent and turning into a bear market. Inflation hit 9.1 percent in June, and the Federal Reserve has been aggressively raising interest rates to help fight it. Many investors expect rising rates to ultimately tip the economy into a recession.
“With central banks backing away from a prolonged period of record low interest rates and easy money, a variety of asset classes have been negatively affected, including stocks, bonds and cryptocurrencies,” says Mark Hamrick, senior economic analyst, Bankrate. “We don’t know how long the pain may last, but history suggests it will end at some point.”
Despite these concerns, the pros surveyed by Bankrate expect the S&P 500 to climb in the year ahead, and they offered advice on how to position yourself to ride out a potential recession.
1. Stay Focused on Your Retirement Accounts
If you have a long time until you need to tap your retirement accounts, don’t sweat a downturn in the market. Instead, it can be more valuable to think of it as an opportunity to buy. Stay focused on your retirement accounts, and you’ll barely notice the blip in the market in a few years’ time.“Remain calm and continue contributing to savings, IRAs and 401(k)s,” advises Michael Farr, CEO, Farr, Miller & Washington, a wealth management firm in Washington, DC.
2. Think and Invest for the Long Term
The experts continually focused on the importance of thinking and investing for the long term.“Stocks are falling sharply on the fear of recession. That creates attractive long-term investment opportunities in quality companies,” says Patrick J. O’Hare, chief market analyst of Briefing.com.
“This current moment isn’t an ‘all-in’ phase after the sharp declines, because we have yet to see earnings estimates adjust properly for the challenging economic period that lays ahead,” he says. “That said, with stocks of quality companies down 30, 40, and 50 percent or more off their highs, this is a moment where one can start accumulating stocks in those companies.”
Other experts broadly agreed with that long-term sentiment.
“Stay fully invested consistent with long-term targets while looking for opportunities to add equities on additional weakness,” says Jeffrey Buchbinder, equity strategist, LPL Financial.
3. Use Dollar-Cost Averaging to Your Advantage
If you’re regularly earning money and investing that into the market, you’re well-placed to ride out the current bear market and any downturn that occurs if the economy does hit a recession.“Invest small and dollar-cost average,” says Jim Osman, founder of The Edge Spinoff Research. “We are not going anywhere fast anytime soon.”
Dollar-cost averaging is an investing technique where you spread out your purchases over time using a fixed amount of money. For example, you might invest $100 in an index fund every week. When the market falls, you’ll buy more shares and when it rises, you’ll buy fewer. But over time you’ll buy at an average price, but neither the best price nor the worst price.
You’ll reduce the risk that you buy at too high a price and you’ll likely be buying when the market hits a low point. You’ll avoid dumping your money in all at once when the market is high, and if you keep investing, you’re more likely to stay invested over time, helping your long-term returns.
4. Maintain Your Investing Discipline
When the market falls, it can be easy to sell or deviate from your long-term investing strategy. But if you have a strong long-term plan, then it’s more important than ever to stick with it.“Maintain your investment plans—rebalance, tax-loss harvest where you can and continue dollar-cost averaging into your retirement plan vehicles,” says Kenneth Chavis IV, CFP, senior wealth manager, LourdMurray.
Rebalancing your portfolio involves selling some of the investments that have outperformed and moving that money into investments that have underperformed in order to bring your portfolio back to its target allocations. Tax-loss harvesting is a practice where you sell losing investments to recoup a tax write-off, helping to reduce your taxes today or offset other gains.
And it’s important to keep your asset allocation aligned with your long-term goals, says Dec Mullarkey, managing director, SLC Management. Asset allocation is how you divide your investments among various asset classes—stocks, bonds, and even cash—to reduce risk and potentially increase returns. For example, if you’ll need money in 20 years, you want to stay invested in assets such as stocks or stock funds that perform well over long periods of time.
“While recessions are inevitable, their timing and severity are hard to handicap,” says Mullarkey. “Given how strong U.S. household and corporate balance sheets are, we are in a good position to tolerate potential growth setbacks and hopefully bounce back quickly.”
