How to buy and hold in a recession

The market is sending mixed signals and some of them have investors wondering about another recession.

“As good as the markets and the economy have been, it will eventually run its course,” says Jeff Soltow, financial planner and wealth manager at Fort Wealth Management in Houston, Texas.

Bond yield curve and stock valuations are two of the chief indicators that can suggest a recession is on the horizon.

“In the past when the curve becomes negative — this is where short-term bonds are yielding more than long-term bonds — a recession has usually followed,” Soltow says. While the stock market is at all-time highs, “in 2018, the gains haven’t been as robust as the last few years.”

[See: 7 Stocks to Buy When a Recession Hits.]

Political and economic policy may also play a role in determining whether a recession arrives sooner, rather than later.

“We’re in a period of high-risk, high-reward politics lately relating to tariffs,” says Joe Heider, president of Cirrus Wealth Management in Cleveland. “How that game of high-stakes poker turns out between the U.S. and foreign nations can very well predict whether we will see a recession or not.”

Time is on your side — for now. While a recession can be frightening for investors, there is a silver lining. Based on the current economic trajectory, you may have a long window for preparing your portfolio.

“In 2018, the yield curve has flattened significantly but the slope has remained positive and the Federal Reserve Bank raised its economic growth projections in June,” says James Ragan, director of wealth management research at D.A. Davidson in Seattle. “Conference Board’s Leading Economic Index, which measures expected economic activity from 10 components, including stock prices and interest rates, has remained positive.”

Based on that, the odds of a recession this year or next are relatively low, Ragan says.

But, the current bull market can’t last forever. Once it draws to its inevitable close, a recession may follow and that’s not the time to panic or try to outsmart the market.

“Predicting the start, duration and end of recessions in a way that lends itself to an executable investment strategy is challenging for even the most skilled professionals,” says Casey Dylan, director of investment product strategy and communications at Symmetry Partners in Glastonbury, Connecticut. “The average investor should avoid the temptation to try, especially when you factor in the potential impact of getting the timing wrong.”

A buy-and-hold strategy may stand you in better stead during the next economic downturn. Here’s how to plan when the forecast includes a recession.

Mix it up. When buying and holding for the long term, diversification is a no-brainer.

“Past recessions have shown us that if you own a diversified portfolio, that you tend to fare better than the overall stock market,” says Michael Neuenschwander, certified financial planner at Outlook Wealth Advisors in Shenandoah, Texas. “Being diversified doesn’t mean you’re recession-proof but it should reduce your losses.”

The question investors should be considering now, Neuenschwander says, is whether their portfolio is diversified and allocated properly based on their risk tolerance, need for income and ability to sustain a decline in their investments when a recession takes hold.

Ragan says investors should consider sectors or investments that naturally take a defensive position when the economy contracts.

[See: 9 Health Care ETFs That Resist Recessions.]

“Some equity investments tend to perform relatively better than others during economic slowdowns, as they make products and deliver services that remain in demand throughout the economic cycle,” he says.

The sectors you may want to increase exposure to now include consumer staples, health care, utilities and telecommunications. At the same time, you may want to take a step back from those sectors or investments that may be more vulnerable in a recession.

“Corporate bonds have done very well during this period of solid economic growth and low volatility,” says Scott Kubie, chief investment officer at Carson Group in Omaha, Nebraska. “Investors have emphasized them in their portfolios, but during a recession, we would expect to see spreads widen and investors stung because they assumed more risk than they expected.”

Kubie says Treasury inflation-protected securities could be an attractive option if tariffs or continued economic growth notch inflation higher. Long-term Treasurys could also do well if you’re looking for a place to stay put during a recessionary period. Just remember to keep liquidity in sight.

“The best way to recession-proof a portfolio is to invest in assets that you believe will have good value in the long term,” says Ray Sturm, co-founder and CEO of AlphaFlow. But, “leave yourself enough liquidity to cover emergencies and costs during down periods so you don’t have to sell.”

One other buy and hold tip: focus on fundamentals.

“There are always investment-specific risks that investors should be aware of that could cause even good companies to go bankrupt during a recession,” Sturm says.

Ragan says companies that are unprofitable, have negative cash flow or carry high debt could be trouble spots in your portfolio if they’re unable to meet their obligations during tighter economic times.

Don’t let emotions steal your Zen. Emotions can easily derail a buy-and-hold strategy in a recession.

“There are several investor behaviors that are consistently associated with underperformance, such as frequently moving in and out of investments and trying to time the market,” Dylan says.

You can, however, keep a cool head to maintain a buy-and-hold position.

“The only way to fight the emotions and knee-jerk reactions is to have planned ahead,” Neuenschwander says.

He advises breaking your portfolio down into segments, based on when you need to tap the money you’ve invested. You can then allocate assets accordingly so that if a recession occurs, your portfolio has sufficient opportunity to recover within the time frame you’ve set for yourself.

Once you’ve established a plan for recession investing, revisit it often.

“Portfolios should be reviewed regularly to compare portfolio weightings to the plan, and changes can be made to reduce or increase risk,” Ragan says.

Remember, however, that your portfolio should reflect the risk you’re comfortable taking, as well as the risk you need to take to achieve your desired results, Kubie says. When in doubt about the viability of a buy-and-hold strategy in a recession, seeking guidance from a professional may soothe frayed nerves.

[See: 7 Stocks That Soar in a Recession.]

“In difficult periods, a trusted advisor can play a key role in helping investors avoid doing the wrong thing at the wrong time,” Heider says. “Although it’s easy to talk about market volatility in the academic sense, in the real world, many investors continue to buy high and sell low.”

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How to Buy and Hold in a Recession originally appeared on usnews.com