Threats to the US economy have increased dramatically over the first four months of 2022, leaving many investors wondering how best to protect their portfolios.
From the war in Ukraine and rising interest rates to soaring inflation and slumping economic growth, warning signs of a possible economic downturn, to say the least, abound, and both Wall Street and Main Street have taken note.
Billionaire investors like Carl Icahn and Leon Cooperman were some of the first to sound the alarm about the growing potential for a US recession, but now former Federal Reserve officials and major investment banks are add to a growing chorus of recession predictions.
Constant warnings from Wall Street have led 81% of American adults to say they believe the US economy is likely to experience a recession this year, according to a CNBC poll conducted by Momentive. And a recent Reuters poll showed that 40% of economists believe the US economy will enter a recession in the next 24 months.
If they are right, investors should be prepared for the worst. Here’s what some top investment advisers recommend investors do to protect their portfolios in the worst case scenario.
Think long term and follow an investment plan
First, investors need to think long term in times of economic turbulence and stick to their investment plans. Actively investing in stocks and properly timing market downturns is a tough game, just ask the hedge fund managers.
From 2011 to 2020, a single investment in the S&P 500 returned almost three times as much as the average hedge fund, according to data from the American Enterprise Institute.
“Investors should invest for the long term based on a financial plan that takes into account their risks, goals and time horizons,” said Brett Bernstein, CEO and co-founder of financial planning firm XML Financial Group. Fortune. “Should a recession come, it’s more about maintaining proper asset allocation and making adjustments to the portfolio based on current market conditions.”
Avoiding panic selling is key to long-term investment success, experts say. After all, since 1927, if an investor invested $100 in the S&P 500 and stayed invested, their portfolio would have been worth more than $16,800 by May 2020. But missing out on the 10 biggest daily gains in the stock market would lower that value. at just $5,576, according to UBS.
“Clients should be comfortable with their allowances and not try to change them once a recession hits,” said John Ingram, CIO and partner at wealth management and investment advisory firm Crestwood Advisors. Fortune. “Given investors’ tendency to sell close to stock market bottoms (and miss out on the market rally), ‘derisking’ portfolios to protect capital will likely lose money as clients convert a temporary loss. of the market in a permanent”.
safe haven assets
However, that doesn’t mean investors should just sit idly by during a downturn. There are so-called “safe haven assets” that can help reduce portfolio risk. But experts say it’s critical to get into these assets prior to a recession begins, not after.
“As markets price in the future, investors need to take action before the recession hits. A healthy dose of cash, as well as bonds with a short maturity (2 years or so) would offer protection,” said J. Douglas Kelly, partner and portfolio manager at Williams Jones Wealth Management. Fortune.
Joseph Zappia, co-chief investment officer at investment advisory firm LVW Advisors, also said acting before a recession hits to protect savings is critical. He recommended investors look to Series I Savings Bonds, which are backed by the US government and return the rate of inflation annually, to protect their portfolios as consumer prices soar.
“It’s more about having a plan before a recession. The old adage that Noah didn’t wait for him to start raining before he built his ark rings true now,” Zappia said.
Then there is the most common safe haven asset of all, gold. Gold tends to outperform stocks in times of economic turmoil, data shows. For example, during the Great Recession, the value of gold rose dramatically, rising 101.1% between 2008 and 2010, according to a report from the Bureau of Labor Statistics.
“As a safe haven asset, a small allocation to gold could have a significant impact on overall portfolio volatility and performance for long-term investors seeking stability in negative market environments and exogenous capital market shocks” , Jeff Wagner, senior partner at LVW Advisors, said Fortune.
Diversify your portfolio
A well-diversified portfolio is another way to help prevent serious losses during a recession, experts say.
“The sage advice is to build a portfolio that can weather volatility by being well diversified (including fixed income, equities, alternative investments, private equity, and real assets),” Jon Ekoniak, CFP, Managing Partner at Independent Investment. consulting firm Bordeaux Wealth Advisors, said Fortune.
While many investors have flocked to high-flying tech stocks and ETFs in recent years, it’s important to remember that the tech-heavy Nasdaq has historically underperformed during recessions.
The index fell more than 80% after the dot-com bubble over the course of a few years, and during the Great Recession, it sank 46% from November 2007 to November 2008 alone.
This is why it may make sense to focus on diversification and look for alternatives to reduce losses.
“A well-diversified portfolio of quality stocks, secure fixed income, including inflation-protected US Treasuries, and diversifiers such as real estate (or other alternatives for qualified investors) can help reduce losses,” Zappia said.
Remember that not every recession is the Great Recession
While recession fears spread like wildfire, it’s also helpful to remember that not all recessions are as painful as the Great Recession.
“It’s important to distinguish between the different severity of recessions,” said John Ingram of Crestwood Advisors.
Ingram pointed out that the Great Recession of 2008/09 was a banking crisis that led to a deep and long-lasting recession. But in today’s economy, US bank balance sheets remain strong, making it “unlikely” that the US will experience the kind of recession it did then.
“Clients should understand that given the low growth outlook, recessions may become more common and will most likely have less of an impact on portfolios than the Great Recession of 2008/09,” Ingram explained. “Perhaps investors can overcome some of the fear associated with the recession.”
This story originally appeared on Fortune.com