Keep retirement momentum: how to recession proof your portfolio

Recession security through preparation

Though it’s still being debated whether or not we’re in an official recession, it is smart to be prepared for whatever may come, since we have no control on the economic circumstances that could be ahead. But what exactly should this preparation look like?

The good news is there’s still time to be prepared should a recession take hold. And at The Advisory Group we help our clients do exactly that. Below we take you through the steps we go through with clients to form a rock-solid recession proof portfolio.

Review existing plans and assets

To secure our clients’ financial plans even during a recession we start first with a look at what is already in place. While we may make adjustments to what you have, we have done the heavy-lifting on portfolio analysis upfront in our work together to remove the guesswork from your asset allocation.

Whether you’re still accumulating wealth, or are well-established in retirement, it’s still critical to consider your investments across multiple time horizons. That’s because recessions hurt you in the short-term but provide major opportunities in the long-term. How we help you hedge against a recession and take advantage of its opportunities depends on your situation. Additionally, major cash infusions (ex: selling a business) may also be cause for an entirely new approach. Together we find the right allocation across emergency cash, cash reserves, and long-term investments in a plan that’s right for you.

Establish emergency funds and cash reserves

Emergency funds are your first line of defense against a recession. But how large that defense should be will depend on where you are in your financial planning journey.

For our clients still accumulating wealth, it’s key to have 3-6 months of living expenses on hand. But beyond that, their money needs to be put to work in a long-term investing plan that helps maintain retirement momentum.  Since this long-term investing has a timeframe of more than five years, it can withstand market fluctuations. Though the value may decrease, clients can wait for the inevitable market recovery before funds are needed.

Once a client enters retirement, those 3-6 months of emergency savings become part of a larger defense. At this stage, we help clients work to keep 2 years of living expenses in their cash reserves. But the exact amount will vary based on income sources (and their reliability).

Determining the right level of emergency funds to maintain while saving for retirement is important because while reserves help to reduce risk overall, the returns on reserves are lower than that for long-term investments over time. For those very close to, or already in retirement, maintaining cash reserves so that you need not draw on your investment portfolio when markets are down mitigates your sequence of returns risk, which can have significant negative effects on retirement cash flows.

Mitigate sequence of returns risk

Your sequence of returns risk stems from the danger of making poorly-timed withdrawals from your retirement accounts. In a recession this risk is amplified. Needing to sell early on in retirement years to meet cash needs when the markets are down sharply will have negative long-term effects, even if the market recovers strongly later in your retirement. This is because not only have your investments likely declined in value, but when you sell investments in a bear market, you lock in the losses. This leaves you with less to reinvest and can cost you in the long run. Again, this is why healthy emergency funds and cash reserves are so important.

On average, a bear market will last a little less than a year.¹ So if you are pre-retirement, with months of emergency funds (plus an active income), you’ll typically make it to the other side without derailing your portfolio. And if you’re already in retirement, two years of cash reserves can protect your nest egg at the time it’s most vulnerable. That is, when you’re in the early stages of retirement and your savings need time to continue growing.

But these are only the first lines of defense. Another key element when recession-proofing retirement is to ensure that while we look to hedge against short-term downturns, we take advantage of opportunities for the long term.  Because our investment allocations are set to withstand short-term bear market declines, our focus during a down market remains on rebalancing and buying into equities to stay true to your long-term allocation.

Capitalize on long-term opportunities

One way to reframe a recession is to see it as a discounter for long-term investments. But that’s only possible when you’re familiar with history.

While trying to time the market is an exercise in futility, using its cyclical nature to your advantage is not. If you keep investing, even during recessionary periods, history says that’s your best shot at investment success.

Check out our full guide on selling stocks during volatile markets, and consider that the S&P 500 Index showed these significant gains immediately after lows:²

• Over 19% within a year after the bottom of the Dot-Com Bubble
• More than 35% within a year after the bottom of the Great Recession
• Greater than 36% within a year after the bottom of the COVID-19 crash

Find a trusted partner with AGSF

At The Advisory Group we’re not just advisors, we’re coaches too. And it’s our responsibility to keep your retirement on track especially when your plan faces the challenges of a recession.

Our team is experienced in guiding clients through volatile markets on their way to retirement success. Our client plans include buffers against downturns while being positioned for long-term growth and a resource for the goals you have ahead of you.

If you’re ready to move forward despite fears of a recession, we’re here to help. Feel free to schedule your complimentary consultation, or calling us directly at (415) 977-1200

References:

• https://www.investopedia.com/a-history-of-bear-markets-4582652
• https://www.macrotrends.net/2324/sp-500-historical-chart-data