Fearing a Recession? Five Things to Do Now to Your Portfolio
Waiting until a recession is ‘official’ could be too late, so consider taking some steps now to set your portfolio up for resiliency.
If we end up seeing a recession in the U.S. later in 2023 or in 2024, it may go down as one of the most widely anticipated in recent history. Investors and markets tend to react to a recession well in advance of an official announcement.
With this uncertainty hanging over our heads, it’s common to wonder how to build a recession-proof portfolio. You should keep in mind that waiting until a recession becomes “official” would have you really late in making any constructive changes to your portfolio. So if you’re considering taking steps, don’t delay.
Begin by Taking Stock of Where You Are on Your Life Path
If you are investing money and taking on any level of risk to get a higher rate of return than cash, you likely won’t be fully immune to recessionary impacts.
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But there are ways to set your portfolio up for greater resiliency heading into a recession. Before you make any changes, it’s very important for you to consider where you are at in your financial life. For example, are you regularly adding to an investment account, in what our firm calls the build and grow phase? If you’re still earning an income, and saving and investing for the future, declines in investment markets are a welcomed entry point. Consider this like a sale, because stocks are being sold at lower prices, and you can add more shares to your portfolio at a discount.
If you are being forced to sell assets during market downturns, you may want to consider having diversifiers in your portfolio to turn to so you can let other parts of the portfolio take the time to recover.
Setting Your Portfolio Up for Resiliency
First and foremost, diversify your portfolio. What happened so swiftly in mid-March with certain banks in the U.S. and abroad collapsing served as a very quick reminder of the risks of concentrating your assets in any specific industry or asset class. You should invest in a variety of asset classes such as stocks, bonds, real estate and alternatives to spread your risk over many areas. Do not rule out investments that are not publicly traded — this is an area we value in portfolio diversification.
Assess your time horizon for the money you’re investing before tough periods arise. I like to discuss goals and time horizons regularly with clients. Something you will hear consistently: If you are going to invest in assets like stocks or areas with higher risk and reward, then you really should allow these assets to have at least a three-to-five-year time horizon to stay invested. Keep this in the forefront of your mind, especially during the good periods, because behaviorally you will second-guess your decisions during the bad ones.
Making emotional decisions with your portfolio is not a good strategy. It leads to selling at the wrong time and waiting too long to get back in when turnarounds happen. On the other side of the coin, you might be thinking you have a large tolerance for risk when everything is going well, yet you discover that’s not actually the case when the markets head south.
Check in with yourself regularly and ask: What will I do if this goes down 20% in a short period of time? Can I ride it out? Be honest with yourself and/or your financial adviser and be wary of comparing yourself and your investment strategy to what you hear about others’ approaches. Unless you are intimately involved in someone’s finances, don’t assume you can afford to do what they’re doing with their portfolio.
Build systematic shock absorbers into your portfolio. This is one of those areas that definitely is not one size fits all. There are ways to systematically reduce riskier assets such as stocks and build up cash in part of your portfolio if markets go into a decline period. If you are a person who is regularly trying to build a portfolio and buy the dips, then this is not likely a good fit for you. However, if you need to live off your money and you need more protection on the downside, then this could be a fit.
Maintain cash reserves to cover your living expenses for a period of time. There is not a one-size-fits-all answer here either. If you have a stable job, regular cash flow and are not at high risk of losing this position, you can possibly get by with three to six months of cash needs in the bank and not invested.
If you have a more irregular income stream and/or have the possibility to be without work for a while, I would generally lean toward keeping 12 months or more of your projected living expenses in cash. In the current environment, at least cash is yielding some interest now, and there are a lot of safe options available to earn with interest rates of 3% to 4% — or even more, utilizing certain strategies.
I am going to be a little bold here. If you feel fear or anger when reading headlines on the financial news, pause and ask what this really means to you. There is a lot of noise day to day; rarely do people ask themselves whether they’ll remember that moment in 12 months or longer. I suspect most are on to a new worry by then. If you reacted and took action, what is your game plan going forward? I would not base any kind of portfolio restructuring on how you feel. That is a strategy that has proven to be terrible over time.
Ultimately, tying economic incidents, like a recession, to your investing strategy over short periods of time can be a recipe for frustration. The five suggestions I make above should help you “recession-proof” your portfolio right now. But they can also be applied during just about any market environment.
A critical piece of this is bringing more rational behavior to investing, rather than reacting to all the alerts happening by the second. Specifically, points two and five are worth dwelling on — they truly matter in protecting your investments and your peace of mind.
Despite what you hear daily, nothing fits perfectly into a calendar quarter or calendar years all the time. That is much too short-sighted for a person who wants to invest successfully for the long term.
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.
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Brian Spinelli is based in Halbert Hargrove’s Orange County and Long Beach offices. His responsibilities encompass running the firm’s investment committee as well as advising individuals and institutions on their investment and wealth advisory needs. Brian was named to HH’s management team in 2012. He earned his Bachelor of Arts in Business Administration – Finance from Loyola Marymount University in 2002 and his MBA from LMU in 2005. He is a CERTIFIED FINANCIAL PLANNER™ professional. Halbert Hargrove is the creator of LifePhase Investing and headquartered in Long Beach, Calif.
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