Consider these seven retirement portfolio management strategies for a recession.
The U.S. economy is getting a head start on a New Year’s hangover, with economists calling for hard times in 2023. According to the Conference Board, there’s a 96% chance the U.S. economy will slip into a recession in 2023. Additionally, a recent National Association for Business Economics survey estimates a 50% chance of a recession in 2023.
“The more subdued outlook coincides with materially higher expectations for interest rates at the end of this year and next,” says Dana Peterson, chair of the NABE survey and Conference Board chief economist. “Panelists expect job growth will slow over the first three quarters of 2023 but remain positive.”
The prospect of a recession could have retirement-minded investors huddling up with their financial planners to strategize against an onerous financial market climate in 2023. “2022 taught investors several valuable lessons,” says Rob Isbitts, chief investment strategist at Sungarden Investment Management in Weston, Florida. “Chief among them is that bonds can lose a lot of money, and that just because something hasn’t happened in your lifetime (or ever), it doesn’t mean it can’t happen.”
Here are the investment moves retirement investors should mull over heading into a potential recession in 2023.
How to Manage a Retirement Portfolio in a Recession
- Review your investor policy statement.
- Don’t try to time the stock market.
- Try dollar-cost averaging.
- Determine if change is needed.
- Know your retirement time horizons.
- Take a holistic view of your retirement savings.
- Leverage higher interest rates.
Review Your Investor Policy Statement
Any investor who works with an investment advisor should get reacquainted with their investor policy statement, or IPS, before making any market-related moves. “Investing during a recession demands sticking to your plan as detailed in your investment policy statement,” says Robert Johnson, a finance professor at the Heider College of Business at Creighton University.
An IPS is a written document that clearly sets out a client’s return objectives and risk tolerance over the relevant time horizon, along with applicable constraints such as liquidity needs and tax circumstances. “In essence, an IPS sets out the ground rules of the investment process,” Johnson says. “It’s the document that guides the investment plan, and includes any target asset allocation changes as the plan holder ages.”
Consider creating an IPS before you encounter challenging market conditions. “It’s best to develop an IPS in a rather calm market,” Johnson says. “The whole point of an IPS is to guide you through changing market conditions. It should not be changed as a result of market fluctuations or changing business conditions.”
An IPS may need to be revised if your individual circumstances change. “That could mean a divorce or other unanticipated life change,” Johnson says.
Don’t Try to Time the Stock Market
One common mistake investors make in market turmoil is to try and time the stock market. But it’s extremely difficult to consistently get in and out of the market at the right time. “Attempting to time the market is fool’s gold,” Johnson says. If you pull your money out of the stock market at the wrong time you could miss out on the recovery.
Try Dollar-Cost Averaging
Many investors have been preparing for a recession for years and have exited the stock market. “Yet the opportunity cost of that strategy is high,” Johnson says. “Instead, people should invest in a low-fee, diversified equity index fund and continue to invest consistently whether the market is up, down or sideways.”
That’s where dollar-cost averaging into an index mutual fund or exchange-traded fund can help. “Dollar-cost averaging is a simple technique that entails investing a fixed amount of money in the same fund or stock at regular intervals over a long period of time,” Johnson says. “For the vast majority of investors, the “KISS” mantra — Keep It Simple, Stupid — should guide their investment philosophy.”
Determine If Change is Needed
As investors experience another downward market cycle, it’s a good idea to evaluate your retirement portfolio asset allocation. “With different sectors and asset classes having fallen at different rates, your portfolio breakdown will likely have changed,” says Ben Waterman, co-founder of Strabo, a global investment portfolio tracking app based in London.
For example, given the extreme market volatility in 2022, your portfolio may not currently be reflecting your target asset allocation. “Thus a portfolio rebalance at the original asset balance may be required,” Waterman says.
Know Your Retirement Time Horizons
Aim to avoid panic selling during times of difficulty. “If you plan to retire within the next five years, for example, it’s generally not a good idea to be buying stocks,” Waterman says. “The implicit volatility we’re seeing now means that, should you see a protracted downturn similar to the one we’re in now, you may have to withdraw capital at a loss.” Take into account the amount of time you have until retirement when making investment decisions.
Take a Holistic View of Your Retirement Savings
If you’ve already invested in stocks and plan to retire soon, consider trying to weather the storm. “You can opt to push back your retirement dependent on economic conditions, or, if you really have to, selling down only the most defensive assets in your portfolio which will have fallen the least,” Waterman advises.
If you can hold off until an economic recovery, that can give your assets time to bounce back. “However, should you desperately need capital, think about selling down your assets only when necessary, and with the most robust, counter-cyclical holdings first, which have been most recession-resistant,” Waterman says. “A well-constructed portfolio should include some of those stocks and funds, and even some cash which can be withdrawn first or invested back into the market at these lower levels if circumstances allow.”
There’s no need to liquidate your whole portfolio while the market is down, so don’t panic. “It might be better to withdraw assets for a few years at reduced rates and take the hit now, and wait for a recovery to bring back up the lion’s share of your portfolio,” Waterman says.
Leverage Higher Interest Rates
Retirement savers who fear what a recession may do to their assets, especially those who are close to retirement or already retired, can turn to savings vehicles for protection. “After a year in which investors were turned off by the negative returns from bonds, we believe this is a great opportunity for savers,” says Ayako Yoshioka, a senior portfolio manager at Wealth Enhancement Group in Los Angeles. “In the decade since the financial crisis, interest rates have been near zero and have forced savers to embrace greater risk as they sought income through dividends in the stock market.”
With interest rates at 4% or more, savers can look to see how much income can be generated in their portfolio without taking on the risks or the volatility of the stock market. “For those who have longer time horizons and are cognizant of the risks associated with equity markets, we believe there will be opportunities to add exposure,” Yoshioka says.