Market Volatility: Safeguarding Your Portfolio During a Recession

Welcome to Investing Insights, your trusted guide to navigating the choppy waters of market volatility. I’m your host, Ivanna Hampton. In our latest podcast series, expert strategists and researchers from Morningstar bring you essential insights, trends, and actionable tips to fortify your investment strategy at least once a month.

As the specter of recession looms larger, today, we’ll delve into the investment options that stand out as safer bets during economic downturns. Recent analyses from Morningstar’s US economics team indicate a heightened likelihood of recession. So, what can you do to shield your portfolio? Let’s explore!

Why Current Market Volatility May Not Be Ending Soon

As we all know, market volatility has become a part of our reality, especially given the current trade war uncertainties. Our guest today is Amy Arnott, a portfolio strategist at Morningstar, who has meticulously examined past recessions to pinpoint which asset classes and sectors performed best—and which suffered the most.

The Current Landscape of Market Uncertainty

“Hampton:** It seems like fears of a recession are growing. How does the current volatility stack up against history?”

Arnott: “Market volatility began escalating around the end of February, with a significant spike in early April. After recent tariff announcements, we experienced a shocking two-day drop in the market. Thankfully, after a nervous 90-day pause, the situation has stabilized somewhat. However, the VIX Index, which gauges future market volatility, remains significantly above average—hovering around 30, compared to the historical average of 20.”

How to Keep Yourself Steady During Market Volatility

It’s no secret that volatile markets can test the most stoic investor.

Hampton: “With market fluctuations keeping us on edge, many are advised against checking their portfolios. How do you manage, Amy?”

Arnott: “Honestly, I had to check mine to manage tax-related transfers. It wasn’t a pleasant sight! Having a diversified portfolio helps cushion the blow, but moments like these remind us to reflect on our investment goals and time horizons. If you’ve aligned your asset allocation with your long-term objectives, some reassurance can go a long way during turbulent times.”

Strategies for Investors Nearing Retirement

Investors poised to retire within the next decade must be especially vigilant.

Hampton: “How does market volatility impact those planning to retire soon?”

Arnott: “If you’re a solid ten years away, there’s less to worry about. However, entering the ‘danger zone’—defined by the five years leading up to retirement—can be precarious. This is when negative market returns can significantly erode your portfolio before you start making withdrawals.”

Practical Steps to Mitigate Sequence-of-Return Risk

For those in the five-year window before retirement, it becomes crucial to adjust your portfolio to include safer assets like cash and short to intermediate-term bonds. This strategy can provide you the security you need during downturns.

The Bucket Approach for Current Retirees

So, how can retirees navigate the volatility landscape?

Hampton: “What do you recommend for retirees in today’s market?”

Arnott: “For those in the first five years of retirement, establishing a robust expenditure plan is essential to minimize sequence-of-return risk. The Bucket approach—allocating one to two years’ worth of withdrawals into cash, five to eight years into fixed income, and the remainder into stocks—can be remarkably effective. This allows retirees to draw from stable sources during downturns, reducing psychological stress associated with fluctuating markets.”

Asset Class Performance: Best and Worst During Recessions

Let’s get into the heart of the matter: portfolio performance.

Hampton: “Which asset classes have typically performed best during recessions?”

Arnott: “Generally, stocks experience negative returns, while bonds often deliver more stability. In downturns, investors flock to bonds and cash, viewing them as safe havens. Remember, as the Federal Reserve typically lowers interest rates during economic contractions, this can be beneficial for bond prices.”

Are Gold Investments Worth It?

Hampton: “Gold is often viewed as a hedge against volatility. Should investors rush to acquire it?”

Arnott: “While gold has gained attention—up around 23% this year—investors should tread carefully. Gold, while reliable in the long term, can be volatile. Moreover, it doesn’t generate income. It’s wise to keep any gold investments proportionate within your overall portfolio.”

Why Large Companies Are Better Positioned During Slowdowns

Hampton: “How does company size factor into performance during economic downturns?”

Arnott: “Larger firms generally show greater resilience during recessions. They often have diversified revenue streams and stronger balance sheets, allowing them to weather economic storms better than their smaller counterparts, who may face more concentrated risks.”

Resilience of Consumer Defensive Stocks

Consumer staple stocks have exhibited consistent resilience during economic downturns.

Hampton: “Do consumer defensive stocks hold up better during recessions?”

Arnott: “Absolutely! Consumer staples—items people consistently need—tend to fare well. While discretionary spending may shrink during lean times, necessities like food and toiletries remain stable.”

Key Takeaways: Creating an Investment Plan

At the end of the day, it all boils down to having a plan and sticking to it.

Hampton: “What’s your advice for investors feeling unsettling emotions driven by market volatility?"

Arnott: “When stressed, returning to the fundamentals of your investment strategy can be incredibly grounding. Understanding your long-term goals and risk tolerance enables you to refrain from impulsively altering your plan in reaction to volatility. It’s important to remind yourself that panicking can have counterproductive effects.”

Final Thoughts

Amy, thank you for your invaluable insights today. As always, your expertise is enlightening and greatly appreciated.

Join us next time for more insights into the world of investments, trends, and strategies that can help you thrive in any market condition. Don’t forget to subscribe to create a brighter financial future!

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