Long Term Investment Options For Retirement Fund Preparation – America’s current economic growth is now the second longest in history. Although the next recession hasn’t happened yet, it will happen at some point.
So let’s take a look at how to prepare your portfolio for a recession, including the specific sectors and asset classes that are best for retirees looking for a secure income stream. Complete and consistent.
Long Term Investment Options For Retirement Fund Preparation
Most investors divide their portfolios into three main asset classes: cash, bonds and stocks. Each group has its own strengths and weaknesses, both over the long term and in both bear and bear markets.
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Cash and cash equivalents (such as savings accounts and short-term U.S. Treasury bills) are a way to provide short-term liquidity so that you have enough money to cover your next expenses.
While these investments offer little income or capital growth (and provide a poor hedge against inflation), they can play a useful role in providing risk-free places to live.
Bonds are the second lowest risk asset class and the most reliable source of steady income during a recession. The disadvantage of most bonds is that they are not protected against inflation (since the interest payment is fixed), and their value fluctuates strongly depending on current interest rates.
However, financial advisers often advise older investors to hold at least some bonds because they have less exposure to so-called “risky assets” such as stocks. In fact, bonds can be a good buffer for a portfolio during a recession.
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For example, according to MFS Investments, global bond prices rose 12% in 2008 and 8% during the 2000-2002 tech crisis. However, as the fixed income performance chart below shows, not all bonds are created equal.
In 2008, high-yield bonds fell by 26.2%, emerging market debt by 12%, while Treasuries rose by 13.7%. Those losses are still better than the S&P 500’s -37% return in 2008, but risk-averse investors inspired by the bond’s low volatility should still be selective when buying.
First, bonds, especially government bonds, are safe havens (US bonds are considered “risk-free”) and the risk of default is very low. Because of this, during recessions and bear markets, investors tend to shift money into less risky assets, which drives up their prices.
As the economy contracts, interest rates and inflation fall to lower levels, reducing the risk of inflation and reducing the purchasing power of bonds. Also, when interest rates fall, bond prices rise. The reason for this is that the new bonds are issued at a lower yield, so the intrinsic value of the existing bonds also increases in line with current market conditions.
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Finally, we come to stocks, which are the ownership shares of companies. Compared to bonds, stocks offer the advantages of better long-term total return, inflation protection, and income generation (many stocks offer higher dividend yields than bonds and increase payouts over time). The downside is that they are “risky assets” that often fall out of favor during recessions and fluctuate wildly in value over short periods of time.
Still, while it may seem counterintuitive that investors bracing for a recession should consider buying more cash and bonds, there are important reasons to own stocks regardless of age.
Specifically, since 1900, stocks have been the best-performing asset class in terms of both absolute return and, importantly, inflation-adjusted total return.
Unless your retirement portfolio is unusually large, most investors still need a mix of active stocks to ensure they have no money left for retirement.
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Let’s take a look at what stocks investors should own to minimize risk during a recession.
There are three main ways investors can “recession-proof” their portfolio stocks. The first is to invest in stocks that have historically produced lower-than-average volatility but have higher overall returns than the broader market.
Historically proven high yielding dividend growth stocks are among the best performing and least volatile asset classes. For example, between 1928 and 2017, a period that included the Great Depression and a market decline of more than 50%, the top 40% gainer in the S&P 500 had a total return of 11.2% per year (see 4. 5 below).
Most importantly for conservative investors, they did so with 30% less volatility (with lower standard deviation) than non-dividend-paying stocks. As a result, their risk-adjusted return measured by the imputed ratio is higher in this period.
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Another way to make your stock portfolio recession-proof is to focus on blue-chip dividend-growing stocks like Elite Dividend. Elite S&P 500 companies that have increased their dividends for at least 25 years and have therefore demonstrated the ability to maintain a sustainable business model, strong balance sheet and conservative corporate culture.
Aristocrats actually had a positive return on the stock market between 2000 and 2002, and in 2008 they only fell 22%. In tough economic times.
More broadly, dividend-paying stocks have consistently shown significantly lower volatility than non-dividend-paying stocks for decades. The diagram below shows the annualized 3-year standard deviation of each group. It can be seen that the blue line indicating dividend payers has been lower than the gray line (non-dividend payers) almost every year since 1927.
Because dividends are more stable than earnings and stock prices, they help create a more stable base for total income.
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A final way to reduce recession risk beyond focusing on quality dividend growth stocks is to tilt your stock portfolio toward defensive sectors. Defense industries’ business models are less affected by recessions because they offer essential goods and services that consumers can purchase even during recessions.
Historically, consumer goods, healthcare, utilities and telecommunications are the most vulnerable to recession. Their sales are much less affected by the state of the economy as they sell basic goods and services such as food, electricity, wireless internet and medicine.
As you can see, in 2008 these sectors, while still in decline, had a much smaller decline than the S&P 500.
Investors interested in preserving capital can move their shares into these defensive parts of the market. However, we prefer not to invest more than 25% of our portfolio in any one sector to maintain reasonable diversification. You never know which sector is performing better (or worse) in a given period.
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Now that we know the basics of which assets can help our portfolios weather a recession, including the importance of investing in quality dividend growth stocks for the long term, how can we begin building a recession-proof retirement portfolio?
Everyone’s individual needs are different, so it’s best to seek out a qualified, fee-based financial planner to create a personalized asset allocation that works for you. You are very helpful.
Choosing the right mix of cash, bonds, and stocks is an important part of this process to maximize your chances of meeting your long-term financial needs. That said, there are some general rules for self-directed investors to prepare for a recession.
The first thing to know is how often recessions occur and how severe they are. A 2016 study by the Federal Reserve of St. Lewis found that after World War II (WWII), there was no statistically significant relationship between the duration of the expansion and the risk of a near-term recession.
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In other words, expansion doesn’t necessarily die of old age. They are usually triggered by some external shock. Another important note is that post-WWII recessions were generally mild and short-lived.
For example, in the modern era (since 1990), recessions typically last less than a year and reduce GDP below 1.5%. The financial crisis that crippled major credit markets and triggered the worst recession since 1945 lasted an unusually long 18 months.
So while no one can predict when the next recession will hit, the good news is that they rarely happen, and when they do, the economy starts to recover in no time. . It is important to be calm and on the right track.
Including the Great Depression, the US has had 10 bear markets (down 20% or more from the previous peak) since 1926. According to JP, the average maturity is 24 months, and the average stock market fall is 45%. Morgan Asset Management.
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Fortunately, after a 10-month correction (10% or more from the previous market high), stocks tend to recover quickly and return to their historical mean in average time.
The bear market persists
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