Protecting Your Portfolio Ahead of Turbulent Times
Saleem Tyab - Aug 30, 2019
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There's talk in the market about an upcoming recession. What can you do about it?
A few weeks back the yield curve inverted and the market went into a tailspin, albeit a very short one. So what does this 2-10 inversion mean and does it portend the coming of a recession? What can you do? Or is it simply a blip in the market that has continued to shrug off all the negatives in its continuing march higher? We were calmed somewhat by the narrative that it doesn't appear to be an imminent threat to returns. So lets take a look at what this 2-10 inversion is saying. In brief it means that the return on a 10yr bond was less than the return on a 2yr bond. Usually, the longer you invest your money, the higher the rate of return but since 1950, an inverted yield curve has always preceded every recession.
It can take up to 34 months for a recession to hit us after a yield curve inversion but it's a good sign that the economy is shrinking. According to Credit Suisse, the market is hit hardest about 22 months after a "2-10" inversion.
So what can you do?
First off, history is a good guide and gives us an opportunity to plan. Remember that the best days in the market usually follow the worst, so do not panic. What you can do is to build defense mechanisms into your portfolio. You may have heard this before but now is the time for you to review your portfolio to see how much risk you're taking and how you can protect yourself from an upcoming downturn. Depending on what stage you are in your life and what your goals are, these mechanisms will differ. Another thing to look at is whether your overall return will be acceptable if certain investments within your portfolio are not generating a return. So you may want to look into options that generate dividends if you haven't already done so. Another thing that you may have heard time and again is how important it is to diversify your portfolio. We routinely see investors ending up with generic portfolios that are not necessarily catered to their needs and risk tolerances.
This is where we can help you by having our team of experts meet with you to thoroughly assess your situation.