🔒Prepare a battle-ready investment portfolio

It’s hard to avoid headlines warning of a looming recession. Signals have been slowly flashing over the past several months, culminating with an inverted yield curve at the end of March. An inverted yield curve, when short-term bonds have higher yields than long-term bonds, is a very good indicator that a recession is coming.

Unfortunately, the yield curve is very bad at timing a recession. Like a tsunami after an earthquake on the coast, you know it is out there, but you don’t know how much time you have to get to higher ground. You also don’t know if the wave will be 5 feet high or 50 feet high. So how do you prepare your portfolio for a recession?

Successful investors stay invested through highs and lows regardless of market volatility.

Frankly, it should always be ready for volatile markets. Professionals in the investment industry recognize that investors should not change their investment allocations based on current, or worse, predicted, market volatility. Successful investors stay invested through highs and lows regardless of market volatility.

Admittedly, that is easier said than done. But if you break down your goals, it can be managed. There are two questions an investor needs to ask themselves: When do I need the money I have invested? Am I properly diversified for my long-term needs?

The first question requires coming up with an allocation between cash, bonds and stocks that’s right for you. An easy way to think of it is breaking your money into three buckets: near-term, mid-term and long-term. The near-term and long-term buckets are easy to allocate. The middle-term is a little more individualized.

Near-term bucket (3-5 years): If you need part of your portfolio in the next 3 to 5 years it should not be invested in the stock market. That money should be invested in bonds, certificates of deposit or a money market account. You really don’t want any risk with funds you need in the short term.

Long-term bucket (10-plus years): The long-term bucket is for money that you need 10 years or longer from now. This money should be invested in stocks and left invested no matter what is going on.

Middle-term bucket (5–10 Years): The middle bucket, which are the funds you need in the next 5 to 10 years, should be in a blend of bonds and stocks. This blend is partly determined by your personal tolerance for market swings. Can you sleep at night with the portfolio changing values? If not, then lean towards bonds. Do you have a higher tolerance for swings? Great, invest more in stocks.

Tolerance is different for everyone and there’s no right answer. The bottom line is that you don’t want to sell stocks when the market has gone down a lot. The proper allocation of your buckets will help you avoid this. Once you have decided what should be in each bucket you will have come up with your personal allocation.

The second question requires making sure your allocation is diversified. You want to own lots of stocks in lots of economic sectors (health care, technology, consumer goods, financials, etc.) and in different regions of the world (China, Europe, Australia, Japan). Exchange-traded funds and mutual funds are built to help you do this. Picking a couple of “hot” stocks to get rich quick isn’t a reality for most of us. Owning a basket of stocks spreads the risk out. Owning international stocks spreads the risk worldwide.

Timing the market, and the coming recession, is nearly impossible, but having your portfolio properly allocated and diversified will you give you the confidence to whether any storm. When the market downturn happens, a proper allocation ensures your assets are working towards your near and long-term goals. If you are building your retirement savings in a 401(k) or IRA, make sure you are adding to your accounts as the market goes down … you will look like a pro buying stocks on sale.

Sara Lewis is executive vice president and director of client services at Spinnaker Trust in Portland. She can be reached at slewis@spinnakertrust.com