Recessions and bear markets are inevitable. Is it even possible to build up a pension portfolio that is recession-proof?
There is no solution that would work for every investor. Instead, asset allocation in a pension portfolio is highly dependent on individual needs, time horizon and risk tolerance. But by applying these criteria, it is possible to at least minimize the risks during an economic recession and market reductions.
This topic becomes relevant again as markets around the world come under pressure from the spread of the deadly corona virus, which damages global supply chains, disrupts travel plans and forces some of & # 39; s world's largest companies to reduce profit guidance.
While investors were worried about the potential economic impact of the virus, all major US indexes slipped into the correction area yesterday. For the benchmark, which fell 4.4%, this was the fastest decline in correction area according to Dow Jones Market Data since at least 1980, according to 1945
S&P 500 weekly price chart
There is still no clarity about how long this disease can linger, or how serious it can harm the global economy. But analysts are increasingly convinced that the chances of a V-shaped recovery are small.
Earnings growth for US companies will stagnate in 2020, according to Goldman Sachs, who adjusted his earnings estimate for the year to $ 165 per share from $ 174 per share, representing a growth of 0%.
"U.S. companies will not generate profit growth in 2020, ”said Goldman & # 39; s chief US equity strategist, David Kostin, in a note to his customers on Thursday. "We have updated our revenue model to include the likelihood of the virus becoming widespread."
Building a defensive portfolio
Increasing cash and bond holdings when recession signs are flashing is a generally recommended strategy to prevent excessive volatility in a long-term portfolio. But that does not mean that you have to completely avoid shares that, despite their wild fluctuations, remain the best-performing investment category in the long term.
Charles Schwab, a US-based bank with $ 3.7 trillion-managed funds, recommends owning 50% in fixed-income assets such as bonds, 30% cash, and 20% in stocks for a conservative portfolio. The allocation of up to 30% in cash is recommended for conservative retirees, allowing them to cover the cost of living without selling shares while the market is depressed or recovering from a low point.
For the equity component of the portfolio, it is important to look for those corners of the equity market that are defensive and perform well in a poor economy. Investors generally resort to investing in bonds as the risks to the economy increase. In an attempt to prepare for the worst – a scenario in which a recession-driven stock sale sends the benchmark index to bear area – smart investors have bought utilities, real estate investment funds (REITs) and basic stocks for consumers for the last 12 months.
One of the best-performing stocks in utility companies is American Water Works (NYSE :), which is 6% higher in the year in which the S&P-500 falls about 9%; Serving customers in Kansas and Missouri, Evergy Inc. (NYSE 🙂 is another share that is still in positive territory, a 2.9% increase since the beginning of 2020, despite this week's massive beating.
These areas of the market are known to perform better in times of need. While investors are going through the bad times, these shares continue to yield regular returns in the form of dividends and regular distributions.
These high-yielding stocks become more attractive as the central bank lowers interest rates to prevent a recession, making them attractive when you compare them with, for example, the yield on government bonds.
The valuations of these safe harbor assets are undoubtedly pretty rich after the large and consistent influx of the past year, but the flight to safety will not stop as long as investors in lower models praise their models.
Bottom Line
Higher cash and bond allocations, diversification and the purchase of traditional safe-haven stocks, such as utilities, are some popular strategies for defensive play in the market when it is almost impossible to avoid corrections. So, although it remains true that investors must change too often from allocation in response to short-term events, it is worth looking carefully at investments to ensure that they are as recession-proof as possible.
