How to invest during a recession

Threats to the US economy increased dramatically during the first four months of 2022, leaving many investors wondering how to best protect their portfolios.

From the war in Ukraine to rising interest rates to skyrocketing inflation and falling economic growth, the warning signs of a potential economic downturn are plentiful, to say the least, and both Wall Street and Main Street have caught on. act.

Billionaire investors like Carl Icahn and Leon Cooperman were among the first to sound the alarm about the growing potential of a U.S. recession, but now former Federal Reserve officials and major investment banks are joining a growing chorus of recession forecasts.

Wall Street’s consistent warnings led 81% of US adults to say they believe the US economy will experience a recession this year, according to a CNBC poll, conducted by Momentive. And a recent Reuters poll showed that 40% of economists believe the US economy will fall into a recession within the next 24 months.

If they are right, investors should be prepared for the worst. Here is what some of the best investment advisors recommend to investors to protect their portfolios in the worst case scenario.

Think long term and stick to an investment plan

First, investors should think long term in times of economic turmoil and stick to their investment plans. Actively investing in stocks and timing market downturns properly is a tough game, just ask hedge fund managers.

From 2011 to 2020, according to data from the American Enterprise Institute, a simple investment in the S&P 500 returned nearly three times as much as the average hedge fund.

“Investors should invest long-term based on a financial plan that takes into account their risks, objectives and time horizons,” said Brett Bernstein, CEO and co-founder of financial planning firm XML Financial Group. Fortune. “If a recession does come, it’s more about maintaining proper asset allocation and making changes to the portfolio based on current market conditions.”

Avoiding panic sales is the key to long-term investment success, experts say. After all, going back to 1927, if an investor had invested $ 100 in the S&P 500 and stayed invested, their portfolio would have been worth over $ 16,800 by May 2020. But missing the 10 largest daily stock market rallies would reduce that value to just $ 5,576, according to UBS.

“Clients should feel comfortable with their allocations and not try to change them once a recession begins,” said John Ingram, CIO and partner of investment advisory and wealth management firm Crestwood Advisors. Fortune. “Given the tendency for investors to sell near stock market lows (and miss the market rebound), ‘risky’ portfolios to protect capital will likely lose money as clients turn a temporary market loss into a permanent one.”

Goods shelter

That doesn’t mean, however, that investors should just sit idle during a recession. There are so-called “safe haven assets” that can help reduce portfolio risk. But experts say it is crucial to get into these resources Before a recession begins, not after.

“As markets discount the future, investors need to act before the recession hits. A good deal of cash and short-dated bonds (about 2 years) would offer protection, “said J. Douglas Kelly, Williams Jones Wealth Management partner and portfolio manager. Fortune.

Joseph Zappia, the co-chief investment officer at investment advisory firm LVW Advisors, also said taking action before a recession begins to protect savings is critical. He advised investors to look to Series I savings bonds, which are guaranteed by the US government and return the rate of inflation on an annual basis, to protect their portfolios from the surge in consumer prices.

“It’s more about having a plan before a recession. The old adage that Noah didn’t wait for it to rain before building his ark now rings true, “Zappia said.

Then there is the most common safe haven of all, gold. Gold tends to outperform equities in times of economic turmoil, the data shows. For example, during the Great Recession, the value of gold increased dramatically, with an increase of 101.1% from 2008 to 2010, according to a report from the Bureau of Labor Statistics.

“As a safe haven, a small allocation to gold could have a significant impact on overall portfolio volatility and performance for long-term investors seeking stability in adverse market environments and exogenous capital market shocks,” Jeff Wagner, a senior partner at LVW Advisors, said Fortune.

Diversify your portfolio

A well-diversified portfolio is another way to help prevent major losses during a recession, experts say.

“The wise 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 the independent investment. advisory consultancy Bordeaux Wealth Advisors said Fortune.

While many investors have flocked to tech stocks and publicly traded funds in recent years, it’s important to remember that historically, the heavily tech Nasdaq has underperformed during recessions.

The index fell more than 80% following the dot-com bubble over a few years and during the Great Recession it fell by 46% from November 2007 to November 2008 alone.

That is why it can make sense to focus on diversification and look for alternatives to reduce losses.

“A well-diversified portfolio of quality equities, secure fixed income, including inflation-protected US Treasuries and diversifiers such as real estate (or other alternatives for qualified investors) can be helpful in reducing losses,” said Zappia.

Remember that not all recessions are the Great Recession

While recession fears are spreading like wildfire, it’s also worth remembering that not all recessions are as painful as the Great Recession.

“It is important to distinguish between the different severity of the 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 solid, making it “unlikely” that the US will experience the kind of recession it experienced then.

“Clients should understand that given the low growth outlook, recessions could become more common and will most likely have less impact on portfolios than the 2008/09 Great Recession,” Ingram explained. “Perhaps investors can overcome some of the fears associated with the recession.”

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