6 ways to prepare your investment portfolio for a recession
- With markets plummeting, many investors are worried about a looming recession.
- Financial planner Nicole Morong says that dollar averaging can save your wallet in the long run.
- It also suggests investing in I bonds, which currently have an interest rate of 9.62%.
With the S&P 500 down 8.23% and Bitcoin down 28.93% in the last month at the time of writing, investors are worried about an upcoming recession.
Rather than making reckless decisions during a bear market, financial planner Nicole Morong of Peterkin Financial says she’s taking a different approach with her clients.
“We’re talking less about how to cut costs before the recession,” she says. “I’ve been asking my clients, ‘Can you keep investing on a consistent basis so you buy shares to sell and take advantage of this downside in the market instead of just having your egg disappear? “
Instead of panicking when the market goes down, here are six smart investment moves that can protect your portfolio in the long run.
1. Diversify your portfolio
Do not put 100% of your money in one investment vehicle. One of the most popular investment tips is to diversify your portfolio, although some people will ignore it during a recession, says Morong.
“One of the most common mistakes I see people make is thinking they are diversified because they own five different S&P 500 funds,” she says. “They have their Fidelity account, their Schwab account, their 401(k) — and they have an S&P 500 fund in every account. They think it’s because the trustee is different that they invest in different things, but really, when the S&P 500 went down, the S&P 500 went down. all of their investment portfolios.
2. Continue to calculate the average cost in dollars
Dollar cost averaging is the practice of investing the same amount of money on a regular basis regardless of market condition. You might buy fewer shares when prices are really high during a bull market, but your purchases are equal when you buy more shares at a cheaper price during a bear market.
Morong adds, “If you’re investing on a weekly, monthly or yearly basis, I wouldn’t do anything different. The only exception is for someone who invests in parts, like if you’re adding money to your investment accounts from a premium.”
If you typically contribute a lump sum to your investment accounts, Morong recommends splitting that lump sum into regular payments from your cash flow rather than waiting for a large chunk of money to invest.
3. If you can buy aggressively while the market is down
“When COVID happened, my clients were saying, ‘I wish I had more money to buy all these stocks and buy into the market at this time.’ “Now we’re in that environment again,” Morong says.
Before doing so, many experts, including Morong, generally recommend building an emergency savings fund before investing aggressively in the market. An emergency savings fund is the equivalent of three to six months of living expenses that are usually held in a high-yield savings account that is easily accessible in the event of an emergency, such as a layoff or a car accident.
4. Understand your time horizon
Morong explains that the time horizon is when you plan to allow your investment to grow in the market before withdrawing it to spend on a particular target. For example, some of its clients plan to let their investments grow for seven to 10 years before cashing in on a home or investment property. Your expected retirement age can also tell you your time horizon.
She adds, “If you have a portfolio of a vacation home or a down payment that has set a five-year or seven-year goal, you probably need to reassess whether or not that money should be invested. Do you have time to wait for that money to come back with the market, and when to do?” In fact Do I need this money?
5. Take advantage of I bonds
“Bonds are a risk-free way to earn a higher interest rate than you can get anywhere in the market right now,” Morong says.
Bonds are low-risk federal bonds issued by the US Treasury and are indicative of the current inflation rate. Currently, the bond’s annual interest rate is 9.62% and it’s “essentially risk-free,” Morong says. Each year, you can buy up to $10,000 of I bonds.
Their interest rate will change, and there are restrictions on when you can cash it out, but it will never go below 0% so you don’t risk losing your entire money.
6. Appointment of a financial planner or advisor
Investing in a financial professional may seem counterintuitive when you’re trying to save as much money as possible before a recession hits, but it’s an investment that can protect your money in the long run. Both financial planners and financial advisors provide clients with guidance on how to budget, invest, and save toward future goals.
The main difference between the two is that a financial planner is a fiduciary agent, which means that he is morally required to give you advice that best suits your financial situation. On the other hand, a financial advisor may receive commissions and kickbacks for recommending financial products that do not fit your needs (although this is not always the case). Find a “fee-only” financial professional to avoid this concern.
“The number one reason to hire a financial professional during a recession is just behavioral accountability,” Murong says. “I think it’s really easy to get scared. When you don’t have someone to bounce ideas off of, you can look in your wallet and think, ‘Oh my God, that’s a slow bleed!’ That’s all my money! This is down by 40%! You may sell or make rash decisions.
Morong adds that financial planners can help run different investment scenarios based on how the market swings so you can make the best long-term decisions. It says, “You can actually get specific numbers to understand the opportunity cost of different actions.”