Investment Corner: What to do if a recession approaches?

Any investor who has been investing for a while knows that markets have good times and bad times. Good times tend to last longer, and research from Dimensional Fund Advisors shows that from 1926 to 2023, bull markets lasted an average of 52 months, while the average bear market lasted less than that. It was much shorter, just 10 months. Still, bears can be painful. So even though the odds of a recession predicted this year have decreased slightly, it’s a natural question to ask: How should I allocate my investments to protect myself from a possible recession?

In fact, the best answer to this comes from a combination of several previous columns. Part 1 is my strong advice against trying to time the market. In 2022-2023, many experts were convinced that a recession was imminent. Some investment experts recommend that you should take all or part of your funds out of the market to prevent this from happening. But the S&P 500 index just closed at an all-time high last Friday. If your money sits on the sidelines instead of going into the market, you’ve missed out. Invest in a portfolio that you can confidently stick with through good times and bad.

Part two is to pay attention to your own personal situation, rather than trying to imitate others whose situations are very different. Your investment horizon, risk tolerance, and capital requirements are likely unique to you. If you find your current portfolio too risky to keep you up at night, it’s okay to adjust your asset allocation. Holding fewer stocks and more bonds will reduce the volatility of your portfolio. Cash and cash equivalents can further reduce volatility. On the other hand, as you become a more experienced investor with clearer goals, the opposite is true: you accept some increased volatility in exchange for the higher expected return associated with owning stocks compared to cash or bonds. could make sense.

Part three of the answer is broad diversification. Some hotshots will try to convince you to time different sectors of the market to reap further profits. You may recognize this as market timing. As we’ve discussed in the past, there is no evidence that trying to guess what will happen next in the market can increase returns. Additionally, this type of strategy concentrates your portfolio in a specific sector, so doing this means giving up some diversification.

As always, my opinion is that it’s much better to design a portfolio that is specific to you and your needs, well-diversified, and built for the long term. The goal is to achieve the desired level of growth while minimizing risk. After all, patience and a long-term perspective are investors’ greatest allies in navigating the complexities of market cycles.

I have no opinion on when the next recession will come. But whatever you choose, invest wisely to weather any possible downturn.

Larry Sidney is an investment advisor principal based in Zephyr Cove. Information can be found at: https://palisadeinvestments.com/ Or call 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past performance does not guarantee future results. Please consult your financial advisor before purchasing any securities.