Recession-Proofing Your Portfolio

The best protection against economic weakness is probably already in your portfolio. [Morningstar](?utm_source=eloqua&utm_medium=email&utm_campaign=newsletter_improvingfinances&utm_content=44856&elqTrackId=453c736daaa44c5fbcdeffafa37892e4&elq=76c05755de664350858a3e785cb370d8&elqaid=44856&elqat=1&elqCampaignId=21775) [Improving Your Finances] Improving Your Finances with [Christine Benz]( [Christine Benz] It’s too early to say if we’re heading into a recession (or already in one), but the bond market certainly seems to think so. Yields on longer-term bonds have dropped below those of shorter-term bonds. That pattern, called a yield-curve inversion, has historically been a harbinger of recession because it signals that investors are betting that yields will go lower because of economic weakness. In a [recent diversification research]( paper that I collaborated on with Amy Arnott, Karen Zaya, and Emory Zink, I took a closer look at which asset classes have tended to be the [best ballast for equity exposure during recessionary periods](. (The paper examined other economic environments, too, including [Amy’s exposition of the asset types that perform well in inflationary periods]( Long story short, high-quality bonds, especially government bonds, have performed reliably during recessionary environments. And while stocks have generally posted losses during recessions, that hasn’t universally been the case. In other words, despite bonds’ abysmal showing in 2022, it would be unwise to throw them overboard today. I’ve also continued to highlight key takeaways from our [2022 State of Retirement Income research]( including a closer look at some of the [flexible withdrawal strategies]( that help boost retirement cash flows. One of my favorites is the guardrails approach, developed by financial planner Jonathan Guyton and computer scientist William Klinger. In contrast with a required minimum distribution-style withdrawal approach, which can lead to dramatic variations in cash flows, the guardrails approach aims to smooth allowable spending while also allowing for the highest starting safe withdrawal rate of any of the strategies we studied. My informal survey of high-caliber financial advisors indicates that most are employing some variation of the guardrails approach; it’s particularly appropriate for retirees who want to maximize their consumption during their own lifetimes rather than leave a big legacy. Speaking of high-caliber financial advisors, I got a lot out of my recent conversation with financial planning guru Michael Kitces. We made [our recent discussion the focus of this week’s podcast]( and we’ve also been running the [videos on Morningstar.com](. Michael is one of the clearest thinkers and speakers on financial planning matters that I know of, and I was able to get his thoughts on the implications of higher yields for asset allocation, retirement planning, and tax-efficient portfolio management. I hope you enjoy it! Finally, I wanted to highlight [a useful piece from my colleague Madeline Hume on structured products](. New issuance in these products recently topped $1.5 trillion, but I worry that many people buying them don’t really know what they’re getting. (Never a good sign!) Many of these products are designed to curb losses in down markets, but Madeline sounds a skeptical note on whether they bring anything to the party that you wouldn’t already have with a reasonably diversified portfolio. With warm regards, Christine Benz [What’s the Best-Performing Asset Type During a Recession?]( While bonds disappointed as diversifiers in 2022, they’ve historically performed well during economic downturns. [Read More]( Share: [facebook]( [twitter]( [linkedin]( ADVERTISEMENT [media]( [media] [Michael Kitces: How Higher Yields Affect Asset Allocation and Retirement Planning]( The financial planning expert discusses the equity risk premium, tax-efficient retirement drawdown, and where to stash cash in a higher-interest-rate era. [Listen Now]( [Want to Boost Your Retirement Income? ‘Guardrails’ Could Help]( The Guyton-Klinger method aligns withdrawals with portfolio performance—but without extreme cash-flow volatility. [Read More]( [Understanding Structured Products in 4 Charts]( Our simple framework breaks down a subset of fast-growing but complex assets. [Read More]( [How Rising Yields Should Affect Asset Allocation for Retirees, Preretirees]( Financial planning expert Michael Kitces weighs in on whether higher bond and cash yields suggest that retirees and preretirees should hold more in those asset classes. [Watch Now]( [When It Comes to Retirement Spending, Flexibility Pays]( But dynamic strategies entail trade-offs—namely, more volatile cash flows and lower ending balances. [Read More]( [The State of Retirement Income: 2022]( A look at how higher bond yields, lower equity valuations, and inflation affect starting safe withdrawal rates. [Read More]( [How Did Diversified Portfolios Hold Up in 2022?]( Dig into asset class performance in 2022. Morningstar analysts recommend tactics to investors trying to build diversified portfolios. Download the report today. [Download Here]( Listen Now Get the latest investing insights and market updates with [Morningstar’s podcasts]( available on your iPhone, iPad, Android, PC, or smart speaker. Stay connected: [twitter]( [facebook]( [linkedin]( [instagram]( [YouTube]( [Apple News]( [View online]( | [See all newsletters]( | [Share your feedback]( [Unsubscribe]( from this newsletter. Or update your [email preferences](. © 2023 Morningstar, Inc. 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