How to invest in a recession
Threats to the US economy have increased dramatically in the first four months of 2022, leaving many investors wondering how best to protect their portfolios.
From war in Ukraine and rising interest rates to skyrocketing inflation and plummeting economic growth, the warning signs of a potential economic downturn are plentiful – to say the least. say – and Wall Street and Main Street have taken notice.
Billionaire investors like Carl Icahn and Leon Cooperman were among the first to sound the alarm about the growing potential for a recession in the United States, but now former Federal Reserve and big bank officials investment add to a growing chorus of recession forecasts.
Constant warnings from Wall Street led 81% of American adults to say they thought the US economy was likely to experience a recession this year, according to a CNBC survey, conducted by Momentive. And a recent Reuters poll showed that 40% of economists believe the US economy will fall into recession within the next 24 months.
If they are right, investors should prepare for the worst. Here’s what some of the top investment advisors recommend investors do to protect their portfolios in the worst-case scenario.
Think long term and follow an investment plan
Above all, investors should think long-term in times of economic turmoil and stick to their investment plans. Actively investing in stocks and timing market declines correctly is a tough game – just ask hedge fund managers.
From 2011 to 2020, a simple investment in the S&P 500 has returned nearly three times more than the average hedge fund, according to data from the American Enterprise Institute.
“Investors should invest for the long term based on a financial plan that takes into account their risks, goals and time horizons,” said Brett Bernstein, CEO and co-founder of financial planning firm XML Financial Group. Fortune. “If a recession were to occur, it would be more about maintaining the appropriate asset allocation and making changes to the portfolio based on current market conditions.”
Avoiding panic selling is key to successful long-term investing, experts say. After all, going back to 1927, if an investor invested $100 in the S&P 500 and stayed invested, their portfolio would have been worth over $16,800 in May 2020. But missing the 10 biggest daily stock market rallies would reduce that value to just 5 $576. , according to UBS.
“Clients should be comfortable with their allocations and not try to change them once a recession begins,” said John Ingram, CIO and partner at investment advisory and wealth management firm Crestwood Advisors. . Fortune. “Given investors’ tendency to sell near stock market lows (and miss the market rebound), “risk-reducing” portfolios to protect capital will likely lose money as clients turn a temporary loss of the market into a permanent loss.”
Safe haven assets
This does not mean, however, that investors should simply sit idly by during a recession. There are so-called “safe haven” assets that can help reduce portfolio risk. But experts say access to these assets is essential before a recession begins, not after.
“As markets discount the future, investors need to act before the recession hits. A healthy dose of cash as well as short-dated bonds (about 2 years) would provide protection,” said J. Douglas Kelly, partner and portfolio manager at Williams Jones Wealth Management. Fortune.
Joseph Zappia, co-chief investment officer at investment advisory firm LVW Advisors, also said acting before a recession hits is key to protecting savings. He recommended investors look to Series I savings bonds, which are backed by the US government and return the rate of inflation on an annual basis, to protect their portfolios from soaring consumer prices. .
“It’s more about having a plan before a recession. The old adage that Noah didn’t wait for it to start raining to build his ark rings true now,” Zappia said.
Then there is the most common safe-haven asset of all, gold. Gold tends to outperform equities during turbulent economic times, the data shows. For example, during the Great Recession, the value of gold rose dramatically, jumping 101.1% from 2008 to 2010, according to a Bureau of Labor Statistics report.
“As a safe-haven asset, a small allocation to gold could have a significant impact on overall portfolio volatility and performance for long-term investors seeking stability in negative market environments and exogenous shocks to capital markets,” Jeff Wagner, senior partner at LVW Advisors, said Fortune.
Diversify your portfolio
Experts say a well-diversified portfolio is another way to help prevent serious losses during a recession.
“Sound advice is to build a portfolio that can withstand volatility by being well-diversified (including fixed income, equities, alternative investments, private equity and real assets),” Jon Ekoniak, CFP , managing partner of independent investment consulting firm Bordeaux Wealth Advisors, said Fortune.
While many investors have flocked to high-flying tech stocks and exchange-traded funds over the past few years, it’s important to remember that historically the tech-heavy Nasdaq has underperformed during recessions. .
The index fell over 80% in the aftermath of the dotcom bubble within a few years, and during the Great Recession it fell 46% from November 2007 to November 2008 alone.
This is why it may be wise to focus on diversification and looking for alternatives to reduce losses.
“A well-diversified portfolio of quality stocks, safe fixed income securities, including US Treasury inflation-protected securities, and diversifiers such as real estate (or other alternatives for qualified investors) can be helpful in reducing losses,” Zappia said.
Remember that not all recessions are Great Recessions
As recession fears spread like wildfire, it’s also worth remembering that not all recessions are as painful as the Great Recession.
“It’s important to distinguish between the different severity of recessions,” said John Ingram of Crestwood Advisors.
Ingram noted that the Great Recession of 2008/09 was a banking crisis that led to a deep and long-lasting recession. But in today’s economy, US bank balance sheets remain strong, making it “unlikely” that the US will experience the kind of recession it did then.
“Clients should understand that given the weak growth outlook, recessions may become more frequent and will most likely have less impact on portfolios than the Great Recession of 2008/09,” Ingram explained. “Maybe investors can overcome some of the fear associated with the recession.”
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