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Investing for Recession? ‘No Need to Get Fancy’: Christine Benz

By Dinah Wisenberg Brin

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What You Need to Know

  • Clients might be looking for ways to brace their portfolios for a possible recession.
  • Morningstar’s Christine Benz advised against stocks as they haven’t done well in previous recessions.
  • High-quality bonds have really delivered during past recessionary periods, she added.

As many economists and market strategists forecast a U.S. recession in the next 12 months, clients may be looking for ways to keep their portfolios on an even keel in rough waters.

Christine Benz, Morningstar’s director of personal finance and retirement planning, recently offered insights on the firm’s website about how investors can add ballast to their portfolios in a recession.

Stocks haven’t done so well in past recessions “because stocks tend to respond to the economic environment, especially if the company is selling discretionary goods or services, [and] people pull back in recessionary times,” she said in a talk with a Morningstar colleague.

Stocks posted losses in five of the last eight recessionary periods, Benz noted, adding, “We probably wouldn’t want to over-rely on the equities to be great performers.”

So what does do well in recessions?

High-Quality Bonds: Recession Stars

“Bonds are the star of the show in recessionary environments, especially high-quality bonds. I wouldn’t put too much faith in lower-quality bonds, which will tend to be very much beholden to what’s going on in the economic environment,” Benz said, according to a transcript.

“When we looked at the category that had the best performance during recessionary periods, high-quality bonds, especially Treasury bonds, really delivered,” she said. In all recessions that Morningstar examined, “bonds came through with flying colors and had positive returns, and they also exhibited a negative correlation with equities.”

That’s one reason why Morningstar considers a balanced portfolio a good idea in various market environments, Benz added.

For investors seeking stability in 70% equities portfolios, she said, “the best ballast, the best category for a weakening economic environment, will be that high-quality bond portfolio. Very plain vanilla. I wouldn’t necessarily dabble in lower-quality bonds if I’m looking for ballast. That high-quality fixed-income portfolio with a heavy dose of government bonds is going to be your friend in a recessionary environment.”

“You don’t need to get fancy. In fact, I would look for the cheapest product that you can find. A total bond market index, for example, would have a healthy dose of Treasury bonds and other government-related bonds, which would tend to perform pretty well in a recessionary environment,” Benz said.

Cash: Yields Could Taper

Current high yields have made cash accounts appealing, and cash should hold its ground in a recessionary environment, according to Benz. On the other hand, she said she wouldn’t be surprised to see yields taper down.

“And, of course, if you’re buying any short-term security — cash or short-term bonds or anything like that — that’s the risk you face, that you’re having to see your bonds mature or see your CD mature and you’re having to reinvest in a lower-yield environment. That’s a consideration, I think, for people who might say, ‘I love cash today,’” Benz said.

“Just be careful because you do face reinvestment risk,” although inflation tends to cool in a recession, and “that’s less of a headwind for you as a cash investor then when inflation is high as it has been over the past year and a half or so,” she said.

(Pictured: Christine Benz)

Dinah Wisenberg Brin

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