Worried about stagnation? Here’s how to prepare your wallet

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“We all understand that markets go through cycles and that recessions are part of the cycle we may face,” said certified financial planner Elliot Herman, partner at PRW Wealth Management in Quincy, Massachusetts.

However, since no one can predict if and when a downturn will occur, it pushes clients to be proactive in asset allocations.

Diversify your portfolio

Diversification is critical when preparing for a potential economic recession, said Anthony Watson, a CFP and founder and president of Thrive Retirement Specialists in Dearborn, Michigan.

He said you can eliminate the company’s own risk by choosing money instead of individual stocks because you won’t likely feel like a company inside an exchange-traded fund of 4,000 other companies.

Value stocks tend to outperform growth stocks that have entered a recession.

Anthony Watson

Founder and President of Thrive Retirement Specialists

He suggests checking the mix of developing stocks, which are generally expected to provide above-average returns, and value stocks, usually trading below the value of the asset.

“Value stocks tend to outperform growth stocks that are entering a recession,” Watson explained.

He added that international exposure is also important, and many investors are lagging domestic assets by 100% for stock allotment. While the US Federal Reserve is aggressively fighting inflation, the strategies of other central banks may lead to other growth paths.

Bond Allocations

Because market interest rates and bond prices typically move in opposite directions, Fed increases have dumped bond values. The benchmark 10-year Treasury, which is rising as bond prices fall, was 3.1% on Thursday, the highest yield since 2018.

Watson said that despite the decline in prices, bonds are still a major part of your portfolio. If stocks fall heading for a recession, interest rates may fall as well, allowing bond prices to recover, which can offset stock losses.

“Over time, this negative association tends to manifest itself,” he said. “It doesn’t have to be day in and day out.”

Advisors also consider term, which measures a bond’s sensitivity to interest rate changes based on the coupon, time to maturity, and the return paid over the term. In general, the longer a bond is, the more likely it is to be affected by higher interest rates.

“High-yield bonds with shorter maturities are now attractive, and we’ve maintained our steady income in this area,” added Hermann of PRW Wealth Management.

cash reserves

Amid rising inflation and lower savings account returns, holding cash has become less attractive. However, retirees still need a cash store to avoid what is known as “return cascade” risk.

You should pay attention to when to sell assets and make withdrawals, as this can cause long-term damage to your portfolio. “This is how you fall prey to the negative sequence of returns, which will eat your retirement alive,” Watson said.

However, retirees may avoid tapping into their nest during periods of heavy losses with a large cash reserve and access to a line of credit for home purchases, he said.

Of course, the exact amount required may depend on your monthly expenses and other sources of income, such as Social Security or a pension.

From 1945 to 2009, the average recession lasted 11 months, according to the National Bureau of Economic Research, the official documentary on economic cycles. But there is no guarantee that the downturn in the future will not be prolonged.

Cash reserves are also important for investors in the “accumulation phase,” with a longer timeline before retirement, said Catherine Valleja, a CFP and wealth advisor at Green Bee Advisory in Winchester, Massachusetts.

I tend to be more conservative than many because I’ve seen three to six months in emergency expenses, and I don’t think that’s enough.

Catherine Vallega

Wealth Advisor at Green Bee Advisory

“People really need to make sure they have adequate emergency savings,” she said, suggesting 12 to 24 months of spending in savings to prepare for potential layoffs.

“I tend to be more conservative than many because I’ve seen three to six months in emergency expenses, and I don’t think that’s enough.”

With the extra savings, there’s more time to strategize for your next career move after a job loss, rather than feeling pressured to accept your first job offer to cover the bills.

“If you have enough liquid emergency savings, you give yourself more options,” she said.

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