The high volatility of some financial and housing-related stocks in recent months, combined with ongoing talk about a recession, has many investors spooked. As a result, some investors might think that now is the perfect time to “recession-proof” their portfolios, pulling money out of the stock market to put it into more stable investment categories, such as bonds. Those with large amounts invested in 401(k) and IRA accounts may be tempted to make similar adjustments.
However, making knee-jerk adjustments based on current market conditions is exactly what many retirement planners, wealth managers and investment advisors say investors should not do.
“Unfailingly, following your intuition is when you take the biggest risks and make the most mistakes,” said Cindy Storm Fischer, a certified financial planner with Brookfield-based Annex Wealth Management LLC. “It’s a recipe for disaster. You need to take the emotion out (of financial decisions) and evaluate your time frames.”
Michael Kramer, a financial advisor and vice president with Ziegler Wealth Management, agreed.
“We tell (clients) not to panic or to be too emotional or get too caught up in what’s going on in the media,” he said. “They should sit down with their advisors. If they’re losing sleep, they should talk to them. Part of our job sometimes is being a psychologist.”
Investors who make sudden financial decisions because of news articles they read or something they see on TV also may miss out on making the right investments at an opportune time, said Alan Purintun, a certified financial analyst, principal and portfolio manager with Milwaukee-based Oarsman Capital.
“Our philosophy is more about not trying to react too much to news events on the oncoming recession,” he said. “By the time it’s recognized and reported ad nauseam in the press, it’s not too late to do anything, but a lot of the benefit that you could have garnered may have already passed.”
Because many people have a difficult time removing emotion from financial decisions, Rebekah Barsch, vice president of wealth management with Northwestern Mutual Life Insurance Co. Inc., recommends working with a wealth manager or financial planner.
“The best way to approach that is to start with a deep and meaningful conversation about what your goals are,” she said. “If your goal is retirement in 15 years, a recession in six months is not going to be meaningful unless you bail out now. The role of the advisor is to help you keep your seat belt fastened and keep you on track.”
Jeff Kowal, president of Waukesha-based Kowal Investment Group LLC, said working with an advisor and coming up with a well-balanced plan is the best defense.
“Planning comes first, your investments are secondary,” he said. “If the investments fit your plan, there’s no reason to panic and make any moves.”
Balanced protection
Making sure that an investment portfolio is well-diversified is the best tool for making sure it’s going to earn positive returns, regardless of the financial environment, experts say.
“In advance of any problems, you need to have good (asset) allocation between stocks, bonds, cash, real estate and international investments that meet your tolerance for risk,” said Kevin Reardon, a financial planner and president of Shakespeare Wealth Management Inc. in Milwaukee.
An investor’s age, family, employment status, need for cash returns, and other factors need to be weighed when determining asset allocation.
“These are the head and heart issues,” Storm Fischer said. “What is the goal? When do you want to retire? How much do you need? You do the numbers, and find the nut you need to crack. That tells you how to invest your money in the long run.”
Regular revisits
Determining the right asset allocation and balancing assets appropriately on a regular basis can help recession-proof a portfolio. Part of recession-proofing one’s portfolio is rebalancing the portfolio, even when certain segments are doing very well, Kramer said.
“When equities are great and rise, I will tell you to take some money off the table,” Kramer said. “You have to peel off some of the profit and push it off to fixed income.”
“It’s not rocket science, but it is counter-intuitive to the average person,” Purintun said. “It’s not recession-proofing (your portfolio). It’s taking advantage of lower prices in equity markets and higher prices in bond markets – buying low and selling high.”
Kowal said he’s been advising clients to move money out of the stock market over the last 18 months “because it looked inevitable to us that the market was going to take a downturn, we just didn’t know how much.”
Some analysts recommend that certain clients change their asset allocations as certain asset types rise and fall.
“Smart rebalancing says that every year you steal an additional five percent from the category that’s done the best,” Reardon said. “If you’re 75 to 25 (percent) stocks to bonds and it grew to 80-20, a smart rebalance is to redistribute 70-30. You’re reducing your risk with the belief that things don’t go in a straight line upwards. What we do to preserve capital is continue to scale back equities in the belief that they will go through a tough scale.”
Discipline pays off
Sticking with an investment plan and maintaining discipline during a recession can be counter-intuitive to many investors, Kramer said. But sticking with the plan can position many investors very well when economic conditions change, especially those with a larger percentage of their assets in equities.
“The key when you’re invested like that is contributing regularly during times like this,” Kramer said. “You’re gathering more shares on the cheap, which will catapult you when we come out of this (the recession).”
“Even if the markets are declining, contributing your maximum amount (in a 401(k) plan) reduces your tax bill,” Reardon said. “You’re adding to your securities at lower prices. You’re building your base as the markets are declining, and that will help you recover that much quicker.”
Persistence of time
Even seasoned investors would be well advised to re-examine their portfolios and asset allocation, said J. Bernard Fiedler, president of the wealth management services unit at Waukesha State Bank, largely because of shifts in life expectation over the past 30 years.
“Most people don’t realize that it’s changed,” Fiedler said. “In the 1970s when I was working with a client that was 65 years old, we were looking at them living into their ‘70s. Now we’re required to run our plan out to age 100 and even that might be a little light. I’ve got some clients that are doing very well into their 80s and 90s.”
Because many clients are living longer, the traditional rules about balancing a portfolio much heavier on bonds and cash-producing assets as they grow older may no longer apply, Fiedler said.
“A person even at 65 and at retirement is saying, ‘We need to ease up on risk,'” Fiedler said. “And now I say, ‘What are you talking about? We’ve still got to plan for 35 years.'”
