Managing Your Portfolio During a Recession

You need patience and a plan to make smart investment decisions

What happens during a recession?

A recession is typically defined as a significant decline in economic activity across the economy. This includes income, employment, production, wholesale retail sales, as well as corporate profits. All of this leads to a decline in the stock market, making portfolio management challenging. However, there are ways such as managing your risks, diversifying or rebalancing your investments, making tactical investment decisions, using dollar-cost averaging, and building cash reserves to help endure volatility.

Invest according to your risk level

How you invest your money during a recession (or at any other time) should align with your risk level and define your investment style – whether you take a more aggressive or conservative approach.

Stay on track

Although it may be painful in the short term, patience during a recession usually brings long-term rewards. Strategic investing can help you stay on track. It is a long-term approach with a time horizon of over 10 years. It is often used to fund retirement or future education expenses. With this approach, you systematically plan to allocate funds across different asset classes depending on your risk level. These assets can include stocks, bonds, real estate, and more.

Rebalance or diversify your portfolio

To keep your portfolio on track, you may need to rebalance. In other words, you may need to sell one type of investment to buy another type. For example, your investment plan may call for 50% stocks and 50% bonds. However, stocks may have increased in value more than bonds over the past year. This makes your portfolio contain 70% stocks and 30% bonds. In this case, you could sell stocks to buy more bonds to rebalance your portfolio and return the mix to 50-50.

Consider tactical investing

You can modify your portfolio to take advantage of opportunities or reduce risks. Unlike strategic investing, tactical investing responds to the market. This approach can be based on the economic cycle. The economic cycle has four stages: expansion, peak, recession, and recovery. Some sectors perform better than others during different parts of the economic cycle. During a recession, consumer staples (such as food and clothing), healthcare, and utility stocks tend to be the strongest. During the recovery phase, real estate, consumer goods, and industrial sector stocks often outperform other sectors.

Use dollar-cost averaging

Regular contributors to retirement plans like a 401(k) might consider using dollar-cost averaging. This is when you contribute the same amount of money at each payment period for each stock or mutual fund you have predefined. When stock prices are low, you’ll buy more shares. When stock prices are high, you’ll buy fewer shares.

Build cash reserves

If you are new to investing, first establish a cash reserve or emergency fund. Your cash reserve should be three to six months’ worth of your salary. If you need cash for any reason during a recession, you won’t have to sell investments to meet needs. Over time, your investments can grow. Having cash reserves can enable you to take advantage of market opportunities in the future.

Frequently Asked Questions (FAQs)

How long does it take for your portfolio to recover from a recession?

Since every portfolio is different, it is impossible to approximate recovery times. Recessions can lead to ongoing declines in stock markets. Bear markets occur when stock prices drop more than 20% from their previous peak. According to data analyzed by brokerage firm LPL Research between 1957 and 2020, bear markets lasted an average of 11 months and took an average of 19 months for stocks to recover losses in bear markets.

How

How much cash should I have in my portfolio before a recession?

If you believe a recession is on the way, it’s wise to bolster your cash reserves and build an emergency fund. It’s likely that your investments will be worth less during a recession, so it may not be ideal to sell them to meet unexpected expenses. For most people, your cash reserves should be equivalent to three to six months of living expenses. For retirees, it’s better to have a larger reserve – between two to four years of your expenses.

Source: https://www.thebalancemoney.com/managing-your-portfolio-during-a-recession-357458