By Julia Osmolia
The U.S. Treasury Bond Market issued a warning three months ago about a possible recession. A recession is defined as “a period of significant economic downturn that lasts longer than two consecutive quarters.” During a recession everyone is subject to risk, but the level of risk varies depending on how much a person has invested and the strategies used for those investments.
On August 14, 2019, the U.S. Treasury Bond market experienced an inverted yield curve where the 2-year short-term bonds paid more interest than the 10-year long-term bonds. The last inversion occurred in December 2005, two years before the Great Recession in 2007 and three years before the financial crisis in 2008. Since 1985, there have been three inversions, each preceding a recession by 13 to 17 months. As a result, the inverted yield curve is widely regarded as a warning sign that a recession is looming.
An inverted yield curve, however, is just that—a warning sign. It does not mean a recession will happen or indicate how long a recession will last. When an inversion occurs, investors should not panic and make rash decisions about their investments. Instead, investors should evaluate their portfolios to assess any possible damage if a recession occurs.
Below are some ways investors can protect themselves against a possible recession:
- Evaluate Investment Strategies & Define Achievable Goals – Investors should evaluate and discuss with their financial advisors their investment goals, asset allocation, risk tolerance, and time horizon. Someone close to retirement may want more conservative investments in the wake of a recession, whereas younger investors may have different goals and higher risk tolerances because they likely have more time to recover from losses suffered from an economic downturn.
- Understand Potential Risks – Investors should know or ask their financial advisor what their portfolio looks like amid an economic downturn to understand the risk they are taking on.
- Diversify Your Portfolio – Investors can mitigate damages suffered from a recession by diversifying their portfolios. Diversification reduces the volatility of the portfolio because different assets react differently during a recession.
- Calculate Personal Cash Flow – Calculating personal cash flows helps investors determine how much cash they should have during a recession. This decreases the chances of investors having to sell their investments at the worst possible time to scrape up some extra cash.
- Confirm Your Broker or Financial Advisor Made Any Necessary Changes to Your Accounts – Investors should contact their financial advisors to ensure the necessary changes have been made to their accounts and that these changes are documented. If a financial advisor completed documents, read through and confirm that the information on the forms is correct before signing any documents.
There is no telling when a recession will happen or how long it will last when it does. Therefore, if you’re concerned about a possible recession, the best safeguard is to ensure you have an investment plan that is tailored to your specific needs to decrease potential losses.