By Mike Patel
As the global economic climate shifts, balancing your retirement portfolio becomes more critical than ever. During times of volatility and recession, investors must be prudent and informed when making any money decisions. Such vigilance is even more necessary if you are within a few years of retirement.
Fortunately, you are not without tools to help you make the right calls. There are proven strategies for optimizing your retirement portfolio when the market is turbulent.
Is it too risky to invest when a recession is looming?
Predicting the precise timing of a recession is, of course, nearly impossible.
And selling into a falling market can be detrimental to your financial plan. Most money experts suggest maintaining a long-term perspective and using a recession as an opportunity to buy undervalued stocks. Timing the market is notoriously difficult, and staying the course pays off in the long run.
If you are in the market, understand which stocks are most affected by economic downturns.
When economic storms appear on the horizon, it’s crucial to re-think some of the assets you typically invest in. Adding more risk in a crashing market makes your wealth particularly vulnerable. Highly leveraged companies, cyclical stocks, and speculative assets are some investments you may want to avoid during a recession.
Highly Leveraged Companies
Highly leveraged companies may be weighed down with excessive debt. Such debt can, in turn, create unsustainable debt-to-equity ratios. During a recession, it’s not unusual for these leveraged companies to struggle with higher interest payments, making them less appealing to investors.
Cyclical Stocks
Cyclical stocks tend to perform better in prosperous times when consumer confidence and employment rates are high. But, during economic downturns, consumers often cut back on nonessentials such as luxury items. Companies that manufacture nonessentials tend to get battered when this happens.
Cyclical stocks in industries like luxury cars, furniture, or high-end clothing may suffer. Review your portfolio with a trusted advisor to see your exposure to cyclical stocks and perhaps cut back.
Speculative Stocks
Often fueled purely by hope and optimism, speculative stocks are, by and large, unproven assets. Optimism tends to evaporate during economic upheavals, rapidly causing the value of speculative stocks to plummet. Investors may flock to so-called “safe money” products such as annuities and life insurance to minimize their exposure to market turbulence.
Certain stocks could perform better in a recession.
As scary as the economy may seem, you don’t want to become so scared that you miss out on opportunities. While avoiding risky investments is always prudent, excising all stocks from your financial plan might cause you to miss out on potential gains. For that reason, you and your advisor may transition some of your money to counter-cyclical stocks with solid balance sheets. As the market becomes increasingly unstable, specific recession-resistant industries can perform well.
- Look for healthy balance sheets.It only makes sense that businesses with solid balance sheets weather economic upheavals more effectively. These companies work diligently to maintain low debt levels, healthy cash flows, and profitability. Such conservative, common-sense approaches to corporate governance may enable these businesses to take on stronger economic headwinds. Some examples of companies that usually maintain strong balance sheets include utilities, consumer goods conglomerates, and defense stocks.
- Find recession-resistant industries. In nearly every global economic downturn in history, at least a few industries managed to thrive. Counter-cyclical stocks within these industries see increased demand when there’s economic uncertainty. Changing consumption patterns and consumer behavior mean industries such as grocery stores, liquor distributors, firearms and ammunition makers, and funeral services often perform well during downturns.Every recession or depression is different, of course. For this reason, you should perform research to see what consumer trends will likely emerge as the economy shifts downward.
The Bottom Line: Before rebalancing, consult your advisor.
Before you decide to rebalance your portfolio, meet with a financial expert to assess current market conditions and the state of your portfolio. Timing is everything. Selling during a market downturn may lead to unnecessary losses. Employ your past reactions to market volatility to establish future investment strategies. Your retirement income planner will help ensure your money decisions align with your risk tolerance and long-term financial goals. In investing, every recession eventually gives way to a recovery. Solid research and commitment to the long term allow you to make more informed choices. You can then enhance the resilience and performance of your investments. Long-term investors who stay the course, learn from past experiences, and adapt to changing market conditions may be better positioned to weather market storms and enjoy a more financially secure future.
Please Note: The above article and all articles on this site have been written and researched for informational and entertainment purposes only, Articles, videos, and other content are not intended to provide, and should not be relied on for any financial, tax, legal, or accounting advice. You are strongly urged to consult your own trusted expert or experts before deciding on any course of action regarding your money.
