10-year constant maturity real rate
Source: Federal Reserve Bank of St. Louis, 8/7/2020. For illustrative purposes only. Not a recommendation to buy or sell any security.
A three-point plan for investing in a recession
Despite a speedy recovery for risk assets, investor questions have grown in number: What does all this stimulus mean for the future? Is the worst behind us? Is now the time to reposition my portfolio?
We could see the virus spreading to new hot spots, triggering further shutdowns as the stimulus spigot runs dry, putting equities under pressure. We could also see material vaccine progress sending the equity market to new all-time highs. A whole range of outcomes exists between these two extremes. If history is any guide, we should expect a bumpy path ahead to a brighter tomorrow. Against this backdrop, to invert a phrase from Daniel Kahneman, investors need to think slow, not fast. In short, avoid reacting with emotion and develop a plan thoughtfully, following these steps:
Consider liquidity needs. Seeking liquidity from acutely risk-averse markets can be painful, forcing investors to realize a loss and eliminating potential for recovery. Investors need to consider the income required from their portfolio and develop a plan to generate it without liquidating growth-oriented assets for a defined period of time. An allocation to lower-risk assets, like Treasuries or high-grade municipals, may tide investors over during future dislocations. The goal of a liquidity plan is to give a portfolio time to recover from a stressful event.
Revisit your benchmark policy portfolio. Is it adequately diversified? Does it have holdings that are expected to perform reasonably well in any environment, regardless of economic growth or inflation? Most advisors can assist investors if they feel their portfolio lacks this level of diversification.
Track the improved portfolio closely. Short of a high level of conviction in a specific asset class, the diversified policy portfolio is what the investors want to own. Achieving this outcome means adjusting on day one to get an actual portfolio aligned with the policy portfolio’s targets and putting in place a methodology to rebalance back to the targets as markets move in the weeks and months ahead.
The bottom line
Today’s uncertainty is arguably higher than one year ago as the ongoing pandemic drives economic outcomes. There’s plenty of opportunity for the situation to get worse before it gets better. Careful planning and a range of tools tailored to specific client goals will allow investors to navigate these challenging times.