From the Expert: Will your investments weather a coming recession?

January 2, 2008

Just as our climate has seasons, so does the US economy. Growth in consumer spending and production warms the economy, bringing with it sunny financial conditions that often last three to six years. But slowdowns-as measured by a shrinking gross domestic product-lead to chilling recessions.

Just as our climate has seasons, so does the US economy. Growth in consumer spendingand production warms the economy, bringing with it sunny financial conditionsthat often last three to six years. But slowdowns—as measured by a shrinking grossdomestic product—lead to chilling recessions, each lasting an average of 10 monthssince World War II.

This January, it looks like an economic winter may soon accompany our environmentalwinter. The credit crunch that started with the subprime mortgage mess precipitateda decline in home prices that may burst the housing bubble. Weakness in the housingmarket usually dampens the overall economy. In my view, we could be on the leadingedge of a US recession.

So, what can you do to help your investment portfolio weather the storm?

  • Be balanced. Recessions hit stocks harder than bonds, which tend to do well during these economic storms. To smooth out the stock market declines that come with a recession, hold a balanced asset allocation-a blend of stocks and bonds (or stock funds and bond funds). The mix that's right for you depends on your financial goals and the rate of return you're aiming for in your overall financial plan.

  • Diversify, diversify, diversify. In the last recession, during 2001, tech stocks got soaked while real estate shone brightly. But trying to call the next hot sector while dodging the doldrums isn't a good idea. It's smarter to own shares in companies of all sizes: growth and value, foreign and domestic. Seldom does everything go down at the same time.

  • Think long term. The thought of losing money may make you nervous, but remember that recessions are short-term phenomena. While the worst recessions can last as long as two years, your personal investment time horizon—how long before you need to actually spend your savings—probably spans a decade or more. Don't let short-term volatility blow away your long-term plan.

Like the seasons that control our weather, the cycle of economic change is a natural part of the climate for investors. So plan for the elements—both fair and foul—by investing in an all-weather strategy.

Ben Utley, CFP, is the founder and president of Utley Financial Planning (www.utleyfp.com) in Eugene, OR. As an independent, fee-only financial advisor, he works with physician families across the United States who are uncertain about their personal finances and want to achieve financial security that can last a lifetime.