Tips for Retooling your Portfolio During a Recession

With the global economy negatively impacted in recent weeks, stock prices have dropped, businesses have closed, and economic activity has slowed measurably all around the world.

In all likelihood the economic expansion that was steadily increasing this decade has come to an end to be replaced by a new, uncertain period. Even professional asset managers have been challenged to adapt their portfolios against the current economic reality, and individual investors have been forced to recalculate their retirement accounts and stabilize the few reliable returns they still own. So what is an average investor supposed to do when the business cycle becomes one that is more volatile than usual? Here are a few ideas to help you on your way, from mindset to investment opportunities.

Patience, Dear Prudence
If your money is already invested in your 401(k) or individual investment account, the best thing you can do is to just sit tight and wait until the economy stabilizes again. It’s only natural to feel panic at the sight of your portfolio value going in the wrong direction, but you only need to look at historical trends to see that the market always bounces back. You may need to postpone a few things until the market returns to normal, but most average investors stand to gain nothing by selling their assets right now.

Loot the Treasury Bonds
If you have unallocated funds to invest or truly want to adjust your portfolio, start with the most obvious safe haven investment: U.S. Treasury bonds. Backed by the full faith and credit of the government of the United States, Treasury bonds are considered to be the safest investment in the world. Nothing has called the creditworthiness of the U.S. into question, and it’s hard to imagine anything large enough to do so. You will get your money back on time at exactly the agreed-upon interest rate.

Unfortunately, the perceived safety of U.S. Treasury bonds makes the government’s cost of borrowing incredibly low – meaning you can expect returns at or under 1% for a 10-year bond. Such low yields mean your returns will rapidly get eaten up by even a modest amount of inflation, and their fixed yields mean there’s no upside potential if the market improves.

All that Glitters
A traditional favorite of fiat currency skeptics, inflation hawks, and conquistadors alike, gold is another asset seen as a safe haven against worsening economic conditions. Its relatively consistent supply, historic use as a store of value, and penchant for growing in value when the overall market falls make gold an ideal choice for diversifying portfolios in times of economic uncertainty.

There are, however, a few downsides to buying gold. The first is that gold doesn’t deliver any returns on its own – it won’t pay dividends like some stocks and it won’t pay interest like a bond, certificate of deposit (CD), or even a savings account. The fundamentals underlying the price of gold are also rather uncertain, meaning the price of gold is more a result of market factors than underlying data. Historical trends and educated guesses will be your only tools to predict how the price of gold will fluctuate.

Money Markets
Defined as a type of mutual fund that invests in low-risk, short-term debt instruments and other securities, money market funds are another type of investment typically seen as resilient to all but the most intense economic forces. The short duration and high quality of their investments minimize risk and uncertainty, and most money market funds provide investors with a consistent income stream in the form of monthly, quarterly, or yearly dividends. Money market funds are also seen as particularly easy to liquidate in case investors need to free up funds, and some financial institutions even let you write checks to withdraw cash directly from your money market accounts.

Like U.S. Treasury bonds, investing in money market funds also necessitates a trade-off between risk and return. The safety and liquidity of money market funds make them an appealing choice for risk-averse investors at any point in the business cycle, but many flee the safety of their low but stable returns for more risky assets when markets are rising.

Stay the Course
If you’re like most individuals with 401(k)s and personal investment accounts, your most prudent course of action is to take a deep breath, turn off the computer, and not check on your portfolio until the market regains its momentum. Most losses will be temporary as long as you don’t panic and sell your assets. But if you want to start investing or really need to reallocate portions of your portfolio, you do have some viable options. Though this list is far from exhaustive and should not be considered formal financial advice, it should provide you with a starting point for minimizing the risk to your nest egg while the economy confronts this latest challenge.

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