4 Ways To Protect Your Portfolio If Trade Wars Lead to Recession
Written by
Vance Cariaga
Edited by
Amber Barkley
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The U.S. economy faced an “elevated” risk of recession due to President Donald Trump’s tariff plans, but J.P. Morgan recently reduced that risk to 40% due to the decreased tariffs on Chinese imports. Still, Joseph Lupton, a global economist at J.P. Morgan, said to “expect material headwinds to keep growth weak through the rest of this year.”
J.P. Morgan CEO Jamie Dimon also raised the risk of stagflation in an interview on Bloomberg TV in late May. Stagflation happens when the economy exhibits high inflation and slow or negative growth, plus high unemployment rates.
If trade wars do lead to a recession or stagflation, financial experts recommend taking these four steps to protect your portfolio.
Diversify Your Holdings
Diversification isn’t just about keeping a balanced portfolio of stocks, bonds and other assets — it’s also about gravitating toward assets that provide stability in an uncertain environment.
The experts at Fidelity Wealth Management recommend investing “defensively,” so you’ll experience “shallower dips” in your portfolio when the broader markets are declining. This could mean putting more money into U.S. Treasury bonds, Treasury Inflation-Protected Securities (TIPS) or alternative asset classes, such as hedge funds and derivatives.
Build Cash Reserves
One of the best ways to recession-proof your portfolio is to “shore up your cash reserves,” according to Charles Schwab. Failing to do so means you could be forced to sell stocks during a market decline and face extensive losses.
For non-retirees, Schwab recommended setting aside three to six months’ worth of living expenses in safe places like interest-bearing checking accounts, money market savings accounts, money market funds and short-term CDs.
Cash reserves for retirees should cover two to four years’ worth of expenses.
Don’t Be Guided by Emotion
It’s easy to let emotions such as fear or greed guide your investment decisions during periods of economic and market volatility. But that’s the last thing you want to do, because it usually means you get away from the investment principles that helped you build wealth in the first place.
“We’ve seen lots of evidence that when people experience significant volatility in the markets, they may become emotional and abandon their financial plan,” Scott McAdam, an institutional portfolio manager with Strategic Advisers, told Fidelity.
Anthony Grosso, a New York-based financial strategist and mortgage loan originator, recommended focusing on areas of opportunity, whether it means buying quality stocks at bargain prices or finding investments that do well during periods of economic stress.
“The number one thing you want to focus on is mindset,” Grosso said. “You don’t go back to the same horse that’s showing weakness. You look elsewhere, even if it’s just a small percentage, because every cycle turns.”
Tweak Your Fund and Bond Holdings
In addition to adjusting your stock investments, Charles Schwab recommended moving some of your money into the following assets during a recession:
- Fundamental index funds: These funds “favor value” because they’re weighted toward fundamentals such as adjusted revenue, dividend yields and earnings.
- Longer-maturity bonds: Investing in longer-maturity bonds is a good idea when interest rates rise, because you can lock in current high rates before they fall.
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