With economic forecasters raising the alarm over the possibility of a U.S. recession, investors should be weighing options for protecting their portfolios. Escalating trade tensions and other economic uncertainties have elevated the probability of a downturn, urging both seasoned and novice investors to seek expert advice on mitigating risk. Financial experts have long advised balance and diversification to survive whatever economic hardships are on the horizon.
The mounting fears of a recession have multiple lines of support. A recent CNBC Fed Survey found that the likelihood of an economic downturn soared to 36% in March. This is a giant leap from only 23% in January. Echoing these fears, a Deutsche Bank survey predicted chances of a recession to be close to 50-50. Even President Donald Trump has recently signaled that he’s open to something different. When asked about the economy, he said we’re in a “period of transition right now.”
Economic wonks are worried about these fears. They recommend that investors stay the course with a diversified strategy versus taking extreme steps due to speculation. Christine Benz, Morningstar’s director of personal finance and retirement planning, emphasizes the need for balance.
You're looking for balance rather than casting your lot with any one economic outcome. - Christine Benz, director of personal finance and retirement planning for Morningstar
History provides an important lesson for any investor who tries to time the market. In 2023, the average investor made around 21%, while the S&P 500 delivered around 26%, DALBAR reported. The story was similar in 2022: Investors lost 21% while the S&P 500 declined 18%. This illustrates the foolishness of trying to time the market. This, too, underscores the need for a long-term, diversified approach to investment.
For those who are approaching or already in retirement, the risk is especially grave. Research has found that bad choices during the first five years of retirement can significantly increase the risk of depleting assets. In other words, to running out your portfolio and outliving your savings. Many financial advisors urge retirees to keep at least some of their investments in equities to achieve growth and outpace inflation. Mention retiree risk profile. Retirees in particular need a firm allocation to bonds and cash. Without it, they might find themselves in a pretty untenable position come the next recession. As longtime retiree finance expert Christine Benz told us, taking steps now while the economy is still booming will be important for these folks.
Asset allocation is the first and most important part of any balanced portfolio. Christine Benz suggests beginning with 60% in stocks and 40% in bonds or cash. Many times a better 50/50 balance can provide a strong base. With a mix of growth potential and income-generating stability, these allocations can help soften the blow that comes with market volatility.
Younger investors with a longer investment horizon can typically take on more risk. Charlie Fitzgerald III suggests that those more than 20 years from retirement should consider allocating 100% of their portfolio to stocks. He focuses on the eventual recovery and long term growth of the stock market.
Stocks have always recovered after bottoming out during recessions - Charlie Fitzgerald III
If you’re looking for a simple, hands-off long-term investing approach, look into target-date funds. Therefore, balanced funds held in a retirement account are a perfectly good choice for you. With professional asset management, diversification, and rebalancing built in, these funds let investors outsource these crucial tasks.
We know that the prospect of a recession is unsettling. According to experts, a thoughtfully-designed and diversified portfolio is just what you need to weather any economic storm. By working with experts, investors can stay grounded and prevent hasty moves. By taking these essential steps, they can avoid the bumps along the road and stay on track to reach their long-term financial objectives.
