We all know that markets go through cycles and recession is a part of the cycle that we may be facing, according to a certified financial planner.
Since no one can predict when a downturn will occur, he wants clients to be proactive with asset allocations.
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Line chart with 510 data points.The chart has 1 X axis displaying Time. Range: 2022-01-03 10:01:00 to 2022-05-04 15:01:00.The chart has 1 Y axis displaying values. Range: 4000 to 5000.End of interactive chart.
Diversification is important when preparing for a possible economic downturn, said Anthony Watson, a CFP and founder and president of Thrive Retirement Specialists.
He said you can eliminate company-specific risk by opting for funds rather than individual stocks because you are less likely to feel a company going bankrupt within an exchange-traded fund of 4,000 others.
Value stocks tend to outperform growth stocks going into a recession.
He suggests checking your mix of growth and value stocks, which are typically trading for less than the asset is worth.
Value stocks tend to do better in a recession than growth stocks.
Many investors default to 100% domestic assets for stock allocations because of international exposure. While the U.S. Federal Reserve is fighting inflation, other central banks may have different growth strategies.
The Fed's rate hikes have sunk bond values since market interest rates and bond prices move in opposite directions. When bond prices fall, the 10-year Treasury's yield goes up.
Bonds are still a key part of your portfolio. If stock prices plummet, interest rates may go down, allowing bond prices to recover, which can offset stock losses.
He said that the negative correlation tends to show itself over time.
Line chart with 1949 data points.The chart has 1 X axis displaying Time. Range: 2022-01-02 19:00:00 to 2022-05-04 16:00:00.The chart has 1 Y axis displaying values. Range: 1.25 to 3.25.End of interactive chart.The duration is a measure of a bond's sensitivity to interest rate changes based on the coupon, time to maturity and yield paid through the term. The longer a bond is, the more likely it is to be affected by rising interest rates.
Herman from PRW Wealth Management said that higher-yielding bonds with shorter maturities are attractive and that they have kept their fixed income in this area.
Cash is less attractive to hold due to high inflation and low savings account yields. Retirees still need a cash buffer to avoid thesequence of returns.
You need to pay attention to when you are selling assets and taking withdrawals, as it can cause long-term harm to your portfolio.
Retirees may avoid tapping their nest egg during periods of deep losses with a significant cash buffer and access to a home equity line of credit.
The exact amount needed may depend on monthly expenses and other sources of income, such as Social Security or a pension.
According to the National Bureau of Economic Research, the average recession lasted 11 months from 1945 to 2009. There is no guarantee that a future downturn won't be longer.
Catherine Valega, a wealth consultant at Green Bee Advisory, said that cash reserves are important for investors in theaccumulation phase.
I do tend to be more conservative than than many because I have seen three to six months in emergency expenses, and I don’t think that’s enough.
She said that people need to make sure that they have enough money in the bank to cover expenses for at least a year.
I tend to be more conservative because I have seen three to six months of emergency expenses, and I don't think that's enough.
There is more time to plan your next career move after a job loss, rather than feeling pressure to accept your first job offer to cover the bills.
She said that if you have enough in liquid emergency savings, you are giving yourself more options.
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