Some experts say a recession is coming. Here’s how to build your portfolio – Henry Club

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Months of stock market volatility, rising inflation and rising interest rates have left many investors wondering if a recession is coming.

The stock market again recorded a fall on Thursday S&P 500 its capping Worst six-month start for a year since 1970Overall, it is down more than 20% year to date. Dow Jones Industrial Average And Nasdaq Composite There has also been a significant decline since the start of 2022, falling by more than 15% and nearly 30%, respectively.

Meanwhile, according to the University of Michigan, consumer sentiment about the economy has declined. consumer surveyA 14.4% drop in June and a record low for the report.

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Some 68% of chief financial officers expect a recession during the first half of 2023 CNBC’s CFO SurveyHowever, expert forecasts differ regarding economic slowdown likely,

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

However, since no one can predict when and if a downturn will occur, Harman stresses clients to be proactive and make sure their portfolio is ready.

Diversify your portfolio

Diversification is key when preparing for a potential economic downturn, said Anthony Watson, a CFP and founder and president of Thrive Retirement Experts in Dearborn, Michigan.

You can reduce company-specific risk by choosing funds instead of individual stocks because you’re less likely to see a company go bankrupt within an exchange-traded fund of another 4,000, he said.

Value stocks tend to outperform growth stocks going through a downturn.

Anthony Watson

Founder and President of Thrive Retirement Specialists

He suggests checking out your mix of growth stocks, which are typically expected to provide above-average returns, and value stocks, typically worth trading for less than assets.

“Value stocks tend to outperform growth stocks going into recession,” Watson explained.

International exposure is also important, he said, and many investors default to 100% of domestic assets for stock allocations. While the US Federal Reserve is aggressively fighting inflation, the strategies of other central banks could trigger another growth trajectory.

Rethink bond allocation

Since market interest rates and bond prices are usually move in opposite directionsThe Fed’s rate hike has lowered bond prices. Benchmark 10 year treasurewhich increases when bond prices fall, Tops 3.48% on June 14Highest yield in 11 years.

Despite falling prices, bonds are still a significant part of your portfolio, Watson said. If the stock is trending bearish, interest rates may also drop, causing a correction in bond prices, which can offset the stock’s losses.

“Over time, that negative correlation starts to show itself,” he said. “It doesn’t necessarily have to be day-to-day.”

Advisors also consider duration, which measures a bond’s sensitivity to interest rate changes based on the coupon, the time to maturity, and the yield paid through the period. Generally, the longer the term of the bond, the more likely it is to be affected by interest rate hikes.

“High-yield bonds with shorter maturities are now attractive, and we have placed our fixed income in this area,” said Harman of PRW Wealth Management.

Assess Cash Reserves

Between high inflation and low savings account yields, holding cash has become less attractive. Although, Retirees still need a cash buffer to avoid what is known as “Order of Return” Risk,

You need to be careful when you are selling assets and making withdrawals, as this can cause long-term damage to your portfolio. “That way you fall prey to a negative sequence of returns, which will eat away at your retirement,” said Watson at Thrive Retirement Specialists.

However, retirees with access to a significant cash buffer and a home equity line of credit can avoid tapping their nest egg during periods of deep loss, he said.

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

[Theaveragerecessionlasted11monthsfrom1945to2009[1945से2009तकऔसतमंदी11महीनेतकचलीकेअनुसारNational Bureau of Economic Research, the official document of economic cycles. But there is no guarantee that the recession will not be long in the future.

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

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

Catherine Velega

Wealth Consultant at Green Bee Advisory

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

“I’m more conservative than many people,” she said, noting the more widely touted suggestion of three to six months’ worth of expenses. “I don’t think that’s enough.”

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

“If you have enough in liquid emergency savings, you are providing yourself with more options,” she said.