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If you feel the market will plunge, you could go 100% to Cash. This is market timing, and most of us do it in some form or another (though not all admit to it).
You could also short the market (maybe purchase something like SDS) but that is rarely "advised" since the markets tend to go up about 80% of the time.
@JoeD and VintageFreak : If 100% cash is your answer, then the next question when to sell your stocks. You do not know the exact timing of the recession but you anticipate it in the coming months. Also there should be some transitional period: you do not sell everything at once and probably would do that gradually. In other words, I am wondering about tactics, if the question makes sense, how and when to reallocate your portfolio in anticipation of recession.
If you know it's coming then yes you go cash, but the reality is nobody knows that it is coming, and particularly when. Stupid question.
Remain diversified. If you want to tilt a little more on the defensive side in anticipation, fine. It is also extremely important what your time horizon is... Would a significant drawdown hurt your ability to retire? Or are you 10, 20 years away from that stage where your portfolio can withstand a hit?
There is never a perfect answer that fits every individual.
I’ve recently surrendered my official market timing certificate before the authorities suspended or revoked it due to incompetence. However, since you ask ... seems to me past rececessions were often preceded a few months ahead by a falling stock market. Some of the reason might be that there’s a lot “smarter” investment crowd out there than you and me - and they’re better at reading the signs of an approaching recession. In addition, while against the law, some may be acting on “insider information” not available to you and me.
A second component of all this is that a declining market in itself can contribute to the onset of recession or make it even deeper. Think about it: Joe Blow might be inclined to buy a new car or refurbish his kitchen when he’s feeling “wealthy” after a big market run-up. But he might decide to withhold such spending after experiencing investment losses of 15-25% in a single year. That pullback in consumer spending is a big part of what recessions are about.
So, if I still possessed my “timing” certificate, I guess I’d get out in front and sell equities and lower quality bonds a few months before the recession started. Than as everybody and the govt. stats began to confirm a recession underway, I’d start buying equities and junk bonds at (likely) depressed levels.
I think if you knew a recession was coming in 3 months it would be too late to sell. Six months, maybe, as they say the market predicts 6 months into the future. Maybe the cautious approach would be to lock into long bonds - not that they are paying high interest rates now, but they would decline through a recession. I myself have been the perpetual pessimist and am consequently under invested in stocks. Therefore, no matter what I know, I’d ride it out but maybe (hopefully) buy into a small cap fund in the darkest moments.
@JoeD and VintageFreak : If 100% cash is your answer, then the next question when to sell your stocks. You do not know the exact timing of the recession but you anticipate it in the coming months. Also there should be some transitional period: you do not sell everything at once and probably would do that gradually. In other words, I am wondering about tactics, if the question makes sense, how and when to reallocate your portfolio in anticipation of recession.
100% cash is not the answer. Your equity allocation is your business based on your risk tolerance, age, etc. To clarify, I'm saying right now instead of trying to bottom fish in bonds, you are better off parking money in the funds I mentioned. That's what I'm doing, FWIW.
You cannot anticipate a recession any more than you can pinpoint when market will start going down. It might have already begun and you don't know there's a recession. Forget recession, observe the market.
I have my own models I used to determine my equity allocation. I have some balanced funds I regularly allocate to and don't touch. I don't really have bond funds other than RPHYX, RSIVX and FPNIX. So basically I invest in equities or cash. That's it.
You need to figure out what kind of investor you are before one can really offer any specific recommendations. No one is a Financial Advisor here (but frankly that's a good thing).
@VintageFreak If I understood you correctly you outlined your investment strategy as following: keep some balanced funds as core, allocate to stocks and cash in different proportions depending on the situation. In the worst case scenario (recession) you will hold your core balanced funds and cash.
Nothing! That's my action or more properly reported, that's my inaction. Forecasting the economy and the market is an impossible task. I don't play that Loser's Game. Nobody gets it right consistently although lucky predictions are sometimes on target giving a false signal of real skill.
Here is a Link to a terrific article on this subject by Carl Richards. His cartoons drive his points home in a memorable way:
His recommended portfolio allocations and analysis are not too bad. Staying the course can be a difficult challenge, but doable. Patience and persistence are always winning characteristics. Good luck to all.
Forecasting the economy and the market is an impossible task. I don't play that Loser's Game
@MJG - Methinks you missed the poster’s point. His was a hypothetical question which contains the words: “Suppose you knew a recession was coming in 3-6 months ... “
Not a bad question if seeking elucidation of how the economy works and how different economic conditions might affect different types of investments. What I think you failed to comprehend sir was the “Suppose you knew” part of @DavidV’s question.
I’m in agreement with you MJG that forecasting markets is a fool’s errand - and got around to making that point in my earlier long-winded response. (It would, perhaps, take an understanding of subtle irony to detect that.) I don’t think you intended to characterize others, including myself, who attempted to address DavidV’s question as “losers,” so I won’t respond in kind.
A different, broader speculative take (PKrugman today):
This is NOT a stock market prediction -- my track record there ain't too good. But I would point out that recent market action -- the big swoops up and down based on not much -- reminds me of 2000, on the eve of the technology bust. What happened then was that investors began losing confidence in the consensus that had underpinned valuations -- the "average expectation of average expectation", in Keynes's words. Every uptick or downtick seemed to lead to a revision of basic views. And now we see it again. So there is a possibility -- but only a possibility -- of a big decline, not for some clear reason but because the story line that has supported stocks for some reason isn't as persuasive as it was.
And I'm just sitting here thinking to myself that if the rise in interest rates alone were affecting the Market, without the Trumpster's trade wars... Where might we be, today. I'm still not down by very much in my portfolio---- yet. But after you spend years growing the portfolio, reach a good "top" position, the slow slide downward is uncomfortable, to say the least. I'm deliberately being perspicacious, taking a long-term view. Even though down by 5% from an all-time high, where I sit today is still a nice place to be. But the market gyrations have come at just the right time to keep me waiting, rather than pulling the trigger--- on going lighter on stocks and heavier on bonds for retirement. I stayed so long a student that my pot will never resemble the size that I see thrown around as an "average" on those M* videos and elsewhere. Wife still works, so we will be ok. But for the sake of self-discipline through the gyrating Market lately, I WILL "pull the trigger" and reduce equities in favor of bonds, once my funds pay-out for the year in December. I've checked the estimates, and it will indeed be a big slug of money, in proportion to the size of my portfolio. And almost all my stuff is in Trad. IRA, and I've not touched it yet for any income. Re-investing it all. Mid-December is just a month and a half away, now. Tempus fugit. Jeez.
Thank you for your comments. I intended no comments relative to the acumen of any investor either on this site or anywhere else. To each his own. I judge no one on this subject given my extremely limited knowledge and experience in this field.
Investing is a very personal decision at least partially governed by individual needs and philosophies that completely escape my knowing and understanding. In the end, we do things for our own special reasons, and therefore more power to each of us. That's what makes for a vibrant and unpredictable market place.
I invest not because of special insights, but because of the long term market's historical returns.
@MJG, I’m sorry to have misunderstood you. But as someone once said: “To be misunderstood is to be great.”. Congratulations on attaining that high pillar.
@VintageFreak If I understood you correctly you outlined your investment strategy as following: keep some balanced funds as core, allocate to stocks and cash in different proportions depending on the situation. In the worst case scenario (recession) you will hold your core balanced funds and cash.
Pretty much. I will add this is exactly opposite to how most people would invest. I hold my balanced funds in my taxable account, not exactly tax efficient. I go all-in or all-out based on what my models tell me in my tax-deferred accounts and I don't worry about tracking cost basis for taxes. I invest in a way that makes me sleep. I don't look at how much market has returned. I'm probably the only idiot who invests this way but I'm a very happy idiot.
Additionally in my taxable accounts, I may trade mutual funds occasionally. Basically pick you favorite aggressive fund at right time, hold for 1-3 years, sell and go away and wait patiently for the next time. If I double my money in these funds I'll get out immediately.
@JoeD and VintageFreak : If 100% cash is your answer, then the next question when to sell your stocks. You do not know the exact timing of the recession but you anticipate it in the coming months. Also there should be some transitional period: you do not sell everything at once and probably would do that gradually. In other words, I am wondering about tactics, if the question makes sense, how and when to reallocate your portfolio in anticipation of recession.
You can sell all your equities in one fell swoop - there is no law against that. If you feel in your gut that a large market correction of -25% to -45% is a strong possibility in the near term and that it may have already started, then you don't mess around playing games with your equity allocation. You get to the sidelines ASAP. IMHO.
Not everybody would agree with that, but I sleep better at night this way. It really is a personal decision. You have to make your own playbook. So long as you have a plan. Not everybody is a BUY AND HOLD investor.
@JoeD So I think I have mentioned many times I don't go binary on the markets. I have 3 models that tell me whether to be 0, 33%, 66% or 100% invested. When they turn up/down I move my allocation in appropriate direction 10-11% at a time. And I never outguess the market.
For instance, if one of my models turns down, and my holdings still go up then I don't sell. I do track the point at which my model turned negative and if my model persists and my holding falls below that point, then and only then I start selling downward.
Right now 2 of my models are negative. So my target allocation is 33%. I'm not there yet unless my holdings make lower lows and I will continue selling. So I'm like a wave trying to catch up with another wave in front of me until we converge. I'm a Smooth Operator not a Fidgety Jerk.
Comments
You could also short the market (maybe purchase something like SDS) but that is rarely "advised" since the markets tend to go up about 80% of the time.
Remain diversified. If you want to tilt a little more on the defensive side in anticipation, fine. It is also extremely important what your time horizon is... Would a significant drawdown hurt your ability to retire? Or are you 10, 20 years away from that stage where your portfolio can withstand a hit?
There is never a perfect answer that fits every individual.
A second component of all this is that a declining market in itself can contribute to the onset of recession or make it even deeper. Think about it: Joe Blow might be inclined to buy a new car or refurbish his kitchen when he’s feeling “wealthy” after a big market run-up. But he might decide to withhold such spending after experiencing investment losses of 15-25% in a single year. That pullback in consumer spending is a big part of what recessions are about.
So, if I still possessed my “timing” certificate, I guess I’d get out in front and sell equities and lower quality bonds a few months before the recession started. Than as everybody and the govt. stats began to confirm a recession underway, I’d start buying equities and junk bonds at (likely) depressed levels.
Maybe the cautious approach would be to lock into long bonds - not that they are paying high interest rates now, but they would decline through a recession.
I myself have been the perpetual pessimist and am consequently under invested in stocks. Therefore, no matter what I know, I’d ride it out but maybe (hopefully) buy into a small cap fund in the darkest moments.
You cannot anticipate a recession any more than you can pinpoint when market will start going down. It might have already begun and you don't know there's a recession. Forget recession, observe the market.
I have my own models I used to determine my equity allocation. I have some balanced funds I regularly allocate to and don't touch. I don't really have bond funds other than RPHYX, RSIVX and FPNIX. So basically I invest in equities or cash. That's it.
You need to figure out what kind of investor you are before one can really offer any specific recommendations. No one is a Financial Advisor here (but frankly that's a good thing).
Nothing! That's my action or more properly reported, that's my inaction. Forecasting the economy and the market is an impossible task. I don't play that Loser's Game. Nobody gets it right consistently although lucky predictions are sometimes on target giving a false signal of real skill.
Here is a Link to a terrific article on this subject by Carl Richards. His cartoons drive his points home in a memorable way:
https://www.businessinsider.com/the-psychology-of-buying-high-and-selling-low-2011-12
His recommended portfolio allocations and analysis are not too bad. Staying the course can be a difficult challenge, but doable. Patience and persistence are always winning characteristics. Good luck to all.
Best Wishes
Not a bad question if seeking elucidation of how the economy works and how different economic conditions might affect different types of investments. What I think you failed to comprehend sir was the “Suppose you knew” part of @DavidV’s question.
I’m in agreement with you MJG that forecasting markets is a fool’s errand - and got around to making that point in my earlier long-winded response. (It would, perhaps, take an understanding of subtle irony to detect that.) I don’t think you intended to characterize others, including myself, who attempted to address DavidV’s question as “losers,” so I won’t respond in kind.
Very Best Wishes
This is NOT a stock market prediction -- my track record there ain't too good. But I would point out that recent market action -- the big swoops up and down based on not much -- reminds me of 2000, on the eve of the technology bust. What happened then was that investors began losing confidence in the consensus that had underpinned valuations -- the "average expectation of average expectation", in Keynes's words. Every uptick or downtick seemed to lead to a revision of basic views. And now we see it again. So there is a possibility -- but only a possibility -- of a big decline, not for some clear reason but because the story line that has supported stocks for some reason isn't as persuasive as it was.
Thank you for your comments. I intended no comments relative to the acumen of any investor either on this site or anywhere else. To each his own. I judge no one on this subject given my extremely limited knowledge and experience in this field.
Investing is a very personal decision at least partially governed by individual needs and philosophies that completely escape my knowing and understanding. In the end, we do things for our own special reasons, and therefore more power to each of us. That's what makes for a vibrant and unpredictable market place.
I invest not because of special insights, but because of the long term market's historical returns.
Best Wishes
Additionally in my taxable accounts, I may trade mutual funds occasionally. Basically pick you favorite aggressive fund at right time, hold for 1-3 years, sell and go away and wait patiently for the next time. If I double my money in these funds I'll get out immediately.
Not everybody would agree with that, but I sleep better at night this way. It really is a personal decision. You have to make your own playbook. So long as you have a plan. Not everybody is a BUY AND HOLD investor.
For instance, if one of my models turns down, and my holdings still go up then I don't sell. I do track the point at which my model turned negative and if my model persists and my holding falls below that point, then and only then I start selling downward.
Right now 2 of my models are negative. So my target allocation is 33%. I'm not there yet unless my holdings make lower lows and I will continue selling. So I'm like a wave trying to catch up with another wave in front of me until we converge. I'm a Smooth Operator not a Fidgety Jerk.
Like I said "so long as you have a plan." Some people play with models. Others go by their gut. Whatever works for you, "Smooth Operator".
Couldn't help myself: