As I wrapped another client meeting where we reviewed an investment plan and portfolio, I was heartened to hear the tone of my client’s voice change from apprehensive at the start to more assured at the end.
Of course, as anyone who buys groceries and gas and sees news headlines knows, there are multiple reasons to feel (and sound) worried. The highest inflation rate in 40 years, a stream of rising interest rates, a labor shortage, a faltering stock market, Russia’s war in Ukraine. Tack on consumers - the engine of the U.S. economy - starting to pull back on spending and fears of a potential recession grow.
Although the set of circumstances driving today’s current economic slowdown are unique, recessions are not. Since 1960, there have been nine recessions. Most of us will experience a handful of recessions in our lifetimes. As a result, we at Van Leeuwen & Company believe that how well protected your investment portfolio is from volatility is based on the thoroughness by which you and your financial adviser have prepared for recessions and how you react to them.
Whether or not the U.S. enters a recession in the near term - due to the Federal Reserve driving up interest rates to tamp inflation - this is the time to review and rebalance (if necessary) your financial plans and portfolios. And this is the reason why my team and I have been proactively scheduling more meetings with all of our clients over the last few months.
Even if we make no changes to clients’ plans and portfolios during these informative meetings, clients gain greater clarity around how today’s market conditions might impact their short- and long-term financial positions and how investing in high-quality companies over time is the surest way to build wealth and reach their goals.
Here are the steps to take to fortify your financial position:
1. Revisit your tolerance for risk
Since the pandemic, many people have reexamined their approach to everything from where they work to how they want to spend their free time. Financial risk is another critical area to reevaluate.
For example, some people feel less comfortable taking as much financial risk as a few years ago, while others’ risk appetite has increased. Where do you land?
Although you could answer with a gut check or an online quiz, the best way to accurately and objectively gauge your current comfort with risk is to consult with
your financial adviser. They should have a researched-based process and tools for measuring it.
2. Review your portfolio and check your exposure
With a better understanding of your current risk tolerance, you should review your portfolio with your adviser to determine your exposure to growth stocks.
These types of stocks represent companies with revenues and earnings that are growing at faster rates than the market. They tend to be newer, tech or industry disruptor-type companies, such as Amazon and Tesla.
Although growth stocks can be lucrative, they are riskier, especially in a volatile market like today with the rising cost of capital (i.e., interest rates). Value stocks, on the other hand, are often undervalued by the market and less sensitive to interest rate hikes. However, they tend to not be as high performing as growth stocks.
During the portfolio review process, investors sometimes find that they own more growth stocks than they’re comfortable with, especially if they’re in or nearing retirement. So, it’s worth checking your portfolio’s exposure.
3. Derisk with diversification
A well-diversified portfolio is critical to lessen the risks of losses during an economic downturn and to protect your financial position. Indeed, spreading your money across industries and different countries (e.g., not just U.S. stocks) can provide cover in all types of markets to their advisory clients.
You should also check that your advisor is a fiduciary, which means they are legally bound to provide advice or recommend investment products and services only in your best financial interest. You might be surprised how many big brand name investment firms are not fiduciaries to their advisory clients only.
At Van Leeuwen & Company, we are proud to be fiduciaries to our advisory clients and only profit when you prosper. Our advice is independent and customized, and our business model is based on service, not sales.
4. Consider increasing your allocation of blue-chip stocks and those further from home
Amid today’s economic and market uncertainty, you might want to add more higher-quality, Steady Eddie stocks to protect your portfolio.
These blue-chip companies are often less volatile investments because they are less interest-rate sensitive and have a track record of surviving market downturns.
The reason they hold up in volatile economic times boils down to their strong business fundamentals. Their earnings and cash flows tend to be consistent, even if their upside is more limited compared to growth stocks. However, as value stocks, blue-chip stocks pay dividends.
5. Consider short-term Treasury bonds or Treasury bills
Backed by the U.S. government, Treasury bonds provide less risk.
There are different types of Treasury bonds: Short-term Treasuries are less sensitive to rising interest rates, any interest earned is exempt from state taxes and they are highly liquid, so you can move this money if another opportunity presents itself. Treasury bills are short-term government securities with maturities ranging from a few days to 52 weeks. Treasury notes have a fixed interest rate and a maturity between two and 10 years. A Treasury bond has a fixed rate of interest every six months until maturity greater than 20 years.
6. Be ready for opportunities
Market declines are not all bad news for investors. One silver lining is that if you have cash on hand, you might be able to buy stocks at lower-than-normal prices to grow your wealth. However, just because an attractive-looking stock is on sale, does not mean you should buy it! As ever, your adviser should follow a robust research process to determine if there are any unexpected opportunities that you can take advantage of.
I advise my clients to cut back on spending before investing, so they can leverage any valuable opportunities to build wealth in the long run. If you don’t have a short time horizon (e.g., in or close to retirement) then this could be a great time to be a long-term buyer.
7. Stick to the plan
As a corporate executive with a more complex financial situation than the average American, your plan and portfolio have hopefully been carefully custom built to your personal goals and unique situation. Given the heavy amount of research and thought that has gone into their construction, they should only need to be reviewed and possibly rebalanced, not discarded without sound reasons.
Of course, volatility is unnerving, but it’s best to not make knee-jerk, emotionally driven and sweeping changes to a plan geared to build wealth for the long haul. As history has shown us, the U.S. stock market has always recovered from economic downturns.
The point is to not sit on your hands but instead be prepared and ready for any recession and subsequent recovery.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time. Stock investing includes risks, including fluctuating prices and loss of principal. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.