Fears have grown that a slowing US economy may slide into recession, perhaps within a year or two and maybe even within a few months. While consumer spending remains strong and unemployment low, the potential recession triggers include the US–China trade war and tariffs…a decrease in corporate investment and profits…and stumbling economies in countries including Germany and the UK. According to an August survey, more than one-third of economists predict a US recession in 2020 and another one-third expect it by 2021.

To help you prepare for a possible recession, Bottom Line Personal asked seven top financial experts what steps they are recommending to clients. 

Investing

Bear markets in stocks typically begin about six months before a recession does, making it imperative to take early action to protect your portfolio…

Stress-test your investments. Check how each of your stocks, funds and other holdings fared in the fourth quarter of 2018 when the overall stock market plunged. Consider paring back or dropping entirely the ones that fared worst. Then establish a personal “sell strategy” for your other investments.

How it works: Decide ahead of time how big a loss you are willing to take in each investment. Unless you plan ahead, making the decision to sell can become increasingly difficult amid a major decline. Many investors become paralyzed with indecision. My clients are quite conservative, so they set ­sensitive sell triggers. For instance, with large-­capitalization stock funds, they set triggers at 5% below the fund’s recent high…for small- and mid-cap stock funds at 7%…for both investment-grade and high-yield (junk) bonds at 2%. You might want to set your trigger points less conservatively, depending on how comfortable you feel with volatility and how soon you might need to draw on the assets. The cash generated from the asset sales can be put temporarily into short-term Treasuries and online money-market accounts. 

Terri Spath, CFA, CFP, is chief investment officer at Sierra Investment Management, a financial-advisory firm that manages $2.5 billion in assets, Santa Monica, California.
SierraInvestment.com


Shift to safer stocks. Replace investments in fast-growing cyclical ­companies—such as technology firms whose profits are closely tied to the ups and downs of the economy—with companies whose revenues and earnings held up well during past economic slowdowns. These noncyclical companies should pay a dividend, which can provide a cushion in down markets. My favorite fund for relatively safe, dividend-paying stocks…

First Trust Value Line Dividend ­Index Fund ETF (FVD) chooses stocks based on Value Line safety rankings, which screen for low-stock-price volatility, strong balance sheets, consistent profits and dividend yields greater than that of the S&P 500 Index. It has 200 holdings, including industrials such as Dover Corp., utilities such as Spire Inc. and consumer-staples giants such as Unilever. Ten-year returns have outperformed the S&P 500 with about 20% less volatility. Recent yield: 2.48%. 10-year performance: 13.7%, which ranks in the top 2% of its category.*

Reduce the amount of company stock you own in your 401(k). None of my clients holds more than 20% of total 401(k) assets in shares of the employer’s stock, no matter how secure they think their job is or how much they believe in the future of the company. If your company is hit especially hard by a weakening economy, you don’t want to face the possibility of losing both your job and much of your retirement savings. 

Jonathan D. Pond is president of the investment-advisory firm Jonathan D. Pond, LLC, Newton, Massachusetts. He is author of Safe Money in Tough Times. JonathanPond.com


Reduce the hidden risk in your bond portfolio. The past few years, bond investors have focused on the risk of rising interest rates, which could hurt prices of existing bonds in your portfolio. But in a recession, interest rates tend to fall, as they have in recent months. The larger danger now is “credit risk,” the possibility that harder economic times could result in your bond issuer failing to make interest payments or failing to repay your principal on schedule. What to do: Hold only high-quality, investment-grade ­government and corporate bonds. The sweet spot now is A-rated bonds with intermediate-term maturities. 

Example of a high-credit-quality bond fund (from the Bottom Line editors)…

Vanguard Intermediate-Term Bond ETF (BIV) offers a mix of US Treasuries and blue-chip corporate bonds with a credit-quality rating of A and an average effective duration (a measure of interest rate risk, with shorter durations indicating greater safety) of six years. Recent yield: 2.05%. Performance: 4.6%. 

Scott B. Tiras, CPA, CFP, is president of Tiras Wealth Management, a financial-advisory firm with $2.2 billion in assets, Houston. He has been on Barron’s Top 100 ­Independent Wealth Advisors list every year since 2011. AmeripriseAdvisors.com/scott.b.tiras 


Add gold. Yes, it’s a highly speculative investment that’s done poorly relative to stocks for much of the decade-old bull market. But putting 5% of your equity portfolio in gold is a smart defensive move. Amid recession fears, gold has topped $1,500 an ounce this year, reaching the highest levels since 2013. Gold, a relatively scarce commodity, tends to dramatically outperform stocks in economic slowdowns. For example, during the 2007–2009 bear market, gold rose about 25% while the S&P 500 dropped by more than 50%. My favorite way to gain exposure to gold…

SPDR Gold MiniShares Trust (GLDM), an ETF that tracks the price of gold and has a shareholder-friendly annual expense ratio of just 0.18%. The gold backing the shares is kept in vaults in London and audited regularly. Although the fund was just launched in 2018, a nearly identical fund, SPDR Gold Shares, has a 10-year annualized performance of 3.6%. 

Neena Mishra, CFA, is ETF research director at Zacks Investment Research, Chicago. Zacks.com


Saving, Borrowing and Spending

During recessions, jobs disappear…salaries get cut…lenders get pickier. Also, yields on bonds and other fixed-income investments tend to fall. Steps to take…

Bolster your available credit. If you lose your job, it’s much harder to qualify for financial lifelines that can keep you afloat if your savings run dry, such as a home-equity line of credit (HELOC) or a new credit card. Check your credit scores at ­AnnualCreditReport.com, and dispute any errors. Pay down debts so that you are using only a small amount of your credit limit. That makes you more attractive to lenders. Consider applying for a HELOC now if you might need one.

Carolyn McClanahan, MD, CFP, is director of financial planning at Life Planning Partners, Jacksonville, Florida. LifePlanningPartners.com


Make sure you have enough money in your emergency fund. Recessions often leave people worried and stressed over job security. An emergency fund gives you peace of mind that you and your household will be secure for a while. If you haven’t already funded your emergency fund, start by figuring out your basic monthly living expenses. Example: If your monthly expenses average $4,000 a month, excluding discretionary items such as meals at restaurants and nights out, then a six-month emergency fund would total $24,000. My general rules for how much you need…

Three months of expenses for two-income households in which both have secure jobs with similar paychecks and comprehensive health insurance.

Six-to-nine months for single-income households or two-income households with one low-wage earner and adequate insurance coverage.

12 months or more for self-­employed workers, employees in industries prone to layoffs or families with medical plans with high deductibles. 

Elizabeth K. Miller, CFA, CFP, is president of Summit Place Financial Advisors, Summit, New Jersey. She is author of Clutter-Free Wealth. SummitPlaceFinancial.com 


Pinpoint discretionary expenses that you’ll cut ahead of time. Recessions can be especially problematic for retirees dependent on fixed incomes. That’s because yields on their savings may drop, resulting in less monthly income. Cutting expenses makes more sense than raising extra cash by selling bonds before maturity or cashing in shares of a mutual fund in down markets. But choosing which expenses to cut can be stressful, especially if it involves money that you give to children or grandchildren on a regular basis. Have a conversation with your family before you have to cut your budget so that there aren’t any negative surprises…and don’t make expensive promises or plans in the near future.

Jennifer Lane, CFP, is a founder and principal at Compass Planning Associates, a financial-consulting firm, Boston. She is author of The Everything Get Rich Book: Surefire Techniques to Increase Your Wealth. Compass Planning.com 


*Performance figures are annualized returns for 10 years through September 15, 2019, unless otherwise specified.