How to adjust your portfolio for a possible recession

The threat of a recession has weighed heavily on many investors’ minds amid higher interest rates, banking turmoil and layoffs. But you should still try to avoid reactive investing moves, according to financial advisors.

Public pessimism about the economy recently notched a new high, according to a recent CNBC survey. Some two-thirds of Americans believe the country is approaching a recession or already in one.

While you may be eager to protect assets from a possible economic downturn, advisors say it’s important to stick with a plan based on risk tolerance and goals.

“Trying to constantly reorient your portfolio to beat a looming recession boogeyman or whatever crisis of the day is a mistake,” said certified financial planner Amy Hubble, principal investment advisor at Radix Financial in Oklahoma City.   

“Stocks are leading indicators and represent future expectations and GDP readings are lagging indicators,” she said. “So by the time we have the data to prove a recession, the markets are looking beyond.”

Hubble says to focus on the things you can control: for instance, save more than you spend, invest regularly, stay diversified, avoid high fees and aim for tax efficiency. 

While economic indicators like the so-called inverted yield curve — when shorter-term government bonds have higher yields than the long-term variety — may be one signal of a possible recession, experts say humans often have the tendency to see or interpret patterns that don’t exist.

Charles Sachs, a CFP and chief investment officer at Kaufman Rossin Wealth in Miami, said there are a lot of running jokes about “how bad economists are at predicting recessions,” because it’s impossible to know when future events will unfold. 

“Don’t let the noise affect you,” he said, emphasizing the importance of “a long-term, strategic focus” when it comes to asset allocation.

“People get caught up in the gamification of investing,” but there’s a reason why investors like Warren Buffett aren’t doing that, he said. “They’re buying good companies at good values and they’re investing for the long term.”

While assets like high-quality bonds have historically performed well during a recession, it’s difficult for investors to “outguess the market,” said Elliot Herman, a CFP and partner at PRW Wealth Management in Quincy, Massachusetts.

“The market is forward looking,” he said. “So maintaining a well-diversified portfolio has never been more important, because you allow yourself to participate as things move higher or protect yourself if things move lower.”