2022 has been a rollercoaster ride for investors. The market hit an all-time high on January 4, 2022, tumbled over 12% through mid-March, rallied back up over 8% to close out March, and then has staged an impressive rally since the mid-June lows. And with inflation rates as high as 9.1% and interest rates recently ticking upward, it’s no wonder many investors feel that a recession is right around the corner.
While it’s true that the current market volatility has raised the investor “fear gauge,” we all know that what goes up must come down. These short-term ebbs and flows are inevitable in the stock market. And even if we head into a longer period of downturn, questioning your investment strategies in the market with each shift simply isn’t a viable or profitable strategy.
The key to weathering the storm is to be proactive with your asset allocations.
Diversification
It’s always important to diversity your portfolio, but in this environment, it’s critical to take a look at how your assets are allocated heading into a recession. Has your risk tolerance changed? Are you invested in a number of individual stocks or mostly funds? How much of your portfolio is allocated to bonds? Have you considered the right blend of value stocks and growth stocks? We’ve seen a shift of capital exiting stocks with higher valuations and conversely being invested in cheaper stocks. In downturns, dividend stocks have historically performed well.
Consider discussing defensive stocks with your advisor. Defensive stocks are considered safer stocks and act in a way to help preserve your portfolio from losses, as they typically perform well during economic recessions. Common defensive stocks are derived from well-established companies that produce necessities that consumers will rely on even during a recession, such as utilities (water, gas, electric), healthcare (medical device manufacturers, pharmaceutical companies), and consumer staples (food, beverages, household items, etc.).
Taking diversification a step further, have you considered weaving alternative investments into your portfolio to distance your portfolio from the current market volatility?
Alternatives
A decade ago, alternative investments used to be seen as a more “exclusive,” but nowadays alternatives have become mainstream. Why? Because they can help offset market volatility, as many of them are not correlated to the market, so their returns tend to be higher during periods of low market yields.
Time Horizon
If you’re considering retiring in the next five years or if you’ve recently started drawing on your retirement account from a recent retirement, a recession could seriously impact your nest egg and make it more difficult to make up market losses in your portfolio. Your portfolio could end up draining faster than you planned.
There are a number of options that you can discuss with your advisor to mitigate risk such as adjusting your investments and spending, delaying retirement, finding other sources of income, and considering tax planning strategies to draw on the right accounts first. Tax efficiency and diversifying your retirement accounts goes a long way and can save you a significant amount of money.
If you’re in your early to mid-career and have 10, 20, 30 years before you retire, stay the course despite the market turbulence. It doesn’t hurt to review your portfolio to ensure that you’re on track with your goals, risk tolerance, etc., but it’s best to ignore the short-term market activity and remember the big picture.
Next Steps
Contact us at (978) 864-9581 to go over your portfolio and your goals so we can establish a game plan to manage the current volatility.