"Financial Planning ... it's not always about money."

Five Ways to Safeguard a Portfolio During a Downturn

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David M. Brenner, ChFC®, CLU®

D. M. Brenner, Inc.
Phone : (858) 345-1001
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The longest bull market in U.S. history has helped many retirees build savings while reducing the risk that they'll outlive their money.

But gathering assets is just half the battle. A smart investment strategy also means continuing to enlarge a nest egg and taking steps to ensure it can weather the next big downturn, financial professionals say.

The Wall Street Journal's latest survey of economic forecasters, released earlier this month, showed a slight easing in predictions of a recession occurring in the next 12 months: seen as a 30.2% probability, down from 34.2% in the survey results from October. Still, taken with concerns about the long bull market and recent trade disputes between the U.S., China and the European Union, this might be a good time to review a portfolio, particularly for investors relying on their assets for income.

Below, we've shared five possible actions to help safeguard and increase, a retirement investment portfolio in the next downturn.


Some investors, of course, aren't particularly worried about a possible recession or a bear market. If you find yourself among this group, ask yourself the following three questions: Is your portfolio dominated by hot stocks and high-yield funds? Are you short on assets that could be easily tapped for cash during a market pullback? Do you own certain investments that made more sense under conditions that have since changed?

If you answered yes to any of these questions, you, too, could be in need of the advice that follows:

Move up, not out

It is natural to want to sell when stocks are up after a long market run, especially if that run is starting to look a little tired. But even now, when many stocks are richly valued, the market could crawl higher for some time, buoyed by the economy's momentum and Federal Reserve interest-rate cuts, says Wasif Latif, head of investments at a capital management firm. And if there are more gains, Mr. Latif says, investors who exited would miss out.

Instead of slashing holdings, Mr. Latif suggests replacing some stocks with others that could prove more resilient in a downdraft—notably quality stocks that trade at reasonable valuations and carry steady or growing dividends.

ETFs that aim for such holdings, says Todd Rosenbluth, who heads fund research at data-provider CFRA, include ones that focus on large-cap and midcap stocks with strong financial measures, such as earnings growth and low debt; or hold shares of low-volatility, large-cap and midcap companies with strong financial performance.

Check the price tag

Broadly speaking, U.S. stocks are trading at a price-to-earnings ratio of around 20. Growth stocks, which have outpaced the rest of the market recently, are significantly higher, with many P/E ratios in the 20s or above, says Greg Powell, a deputy chief investment officer. If the economy hits a soft patch, Mr. Powell warns, stocks trading at loftier valuations—and funds or ETFs that own them—could underperform.

Mr. Powell suggests investors visit the websites of fund firms to check the P/E ratios of funds or ETFs they own. If they are mostly above the broad market's valuation, an investor could bring down the overall P/E ratio of their portfolio by adding a fund or ETF that focuses on value stocks, which are those believed to be undervalued by the market in comparison with comparable stocks.

Because value stocks have lagged,"there is a lot of value in value," says Carlton Neel, chief executive of Chaikin Analytics, a Philadelphia-based equity research and ratings firm.

Get less stress

Those who worry about market gyrations might look closely at how the equities portion of a portfolio is doing compared with a benchmark such as the S&P 500, says Robert Steen, advice director at USAA. That could help flag any missteps by retirees managing their own accounts—or confirm that the investors are doing a good job, Mr. Steen says.

Another move might be using the analysis tool on an online brokerage site to see how a portfolio is allocated and whether the asset mix is appropriate for someone with that person's investment goals.

Retirees who lack other income sources also need to maintain liquidity by holding some cash and cash-equivalents that can be tapped easily to meet expenses, Mr. Steen notes. Depending on the situation, a person may need to hold as much as a year's worth of expenses in such assets.

Weed the garden

A portfolio can get unruly if an investor hasn't periodically trimmed rapidly growing positions, says Jordan Kaufman, a wealth adviser. There may be a strongly appreciated holding of stock from a former employer. Sometimes investors become enamored with one market sector and load up on it, he adds.

"Anytime you own too much in one sector, you're exposing yourself to more risk," he says.

A more balanced approach, he says, might be to own some stocks or ETFs in each of the 11 market areas represented in the S&P 500 index. If each one represented around 9% of the portfolio's equities value, they all would be approximately equal in weighting. This could have the benefit of reducing individual sector risk and potentially lowering the volatility of an investor's equity holdings materially, Mr. Kaufman says.

Diversify the defense

Traditionally, amid worries about an economic downturn, investors have flocked to stocks considered defensive, such as consumer-staples producers and utilities. But many people have done that already, boosting valuations there. Moreover, these sectors might not give a retiree enough long-term appreciation to keep pace with inflation, says Mr. Powell.

It might make sense to look elsewhere—which, for less-experienced investors, might justify paying a little more in management fees and buying a conservative actively managed fund.

Mr. Pollock is a writer in Pennsylvania. He can be reached at reports@wsj.com.

David M. Brenner profile photo

David M. Brenner, ChFC®, CLU®

D. M. Brenner, Inc.
Phone : (858) 345-1001
Schedule a Meeting