Should you recession-proof your investment portfolio?
Good question, and yes, everyone’s asking.
An economic recession is defined as two consecutive quarters of negative economic growth. The U.S. economy has experienced 10 recessions since 1950, according to the National Bureau of Economic Research.
Does this mean stock prices drop also? Not necessarily.
The most severe was the Great Recession of 2008-2009, and the mildest was 2001, according to Dan Roccato, president of Quaker Wealth Management in Moorestown, N.J.
On average, the market declines 5.3% during an economic recession. The worst drop totaled a loss of -36.4% and the stock market’s best gain totaled +16.6%.
“We won’t know we are in a recession until we have been in for six months. Hence, predicting one is a fool’s errand,” he said. “A genius would know exactly when to ‘sell’ just before the recession and when to buy at the bottom. We don’t know any geniuses. A savvy investor would hold on through the recession because the ensuing market recoveries were epic. Our clients did this” in the recession years between 2007 and 2009.
“The question I’m hearing more frequently is ‘How do you recession-proof your portfolio?’ First, it presumes that a recession is coming — and soon. I know a recession is coming, but I don’t know when, nor does anyone else. So, specifically rejiggering your portfolio to ‘recession proof,’ it is silly,” said Dan Wiener, editor of the Independent Adviser for Vanguard Investors.
Second, “the question assumes a portfolio protects you in a recession but won’t leave you high and dry if the recession comes and goes and you mistime its ending, or the recession takes longer to arrive than expected.”
Wiener examined the last three U.S. recessions, which occurred in the early 1990s, the year 2001, and the most recent Great Recession ending in 2009.
During 1990-1991, the best performing Vanguard fund was Vanguard Health Care, which rose 23.4%. Meanwhile, the S&P 500 Index gained 7.8%, and the average Vanguard fund gained 4.5%, including bond funds.
In the 2001 recession, which lasted only eight months, Vanguard Global Capital Cycle (formerly a gold fund) rose 28.3%, while the average fund gained 1.8%. The S&P 500 Index fell 1.0%.
Finally, during the Great Recession, Vanguard GNMA Fund, a bond fund, led the way with a 9.9% gain while the average Vanguard fund declined 22.2%. The S&P 500 Index dropped 35.0% during the same period.