While you could be in cash 100 percent right now, you would not have any earnings on your investments. In fact, you’d be losing about 2 percent annually due to inflation. So that’s not a very good strategy.
While it is probable that there will not be a recession in the next few months, if we created a strategy that assumed the worse, we might miss the opportunities for some great earnings in the meantime.
So this is what I recommend as an overall strategy:
- Have a written investment plan that outlines your risk tolerance and how you will allocate your resources. For example, if preservation of capital is the overriding goal, go heavy on money markets and bonds. Or if your risk tolerance (or you are young), go for high-growth investments, or at least those that have the potential, such as small caps, or something along those lines.
- Most stock broker’s web sites will let you design your portfolio based on these factors. Schwab offers customized wizards to design a portfolio based on your age and risk tolerance. Even if you are not a client, you can access a lot of information on Schwab’s website. Start with 3 ways to build an all ETF portfolio.
- Always have an exit strategy, because you never know when the market will turn. Normally, the stock market will begin a downward leg into a correction or bear market before a recession actually is formally announced. Use stop orders to automatically exit your positions and sweep the funds into money market funds.
- Learn how to hedge your portfolio, if you think this is right for you. Again, Schwab has some advice on this: How to hedge your portfolio.
- Part of your investment plan should be continuing education that covers different investment topics. The more you know, the better investor you will become. I try to read at least five or six books a year on investing, economics and history. And I subscribe to different newsletters for different perspectives.
For example, I ran their wizard for ETFs, based on “I want income stability and preservation of capital,” which is a conservative strategy. The recommendation was:
- Large cap ETF (15%), International (5%), Fixed Income (50%) and Cash Investments (30%).
For “I am concerned about a growth and value, and have good tolerance for risk (aggressive):
- Large cap ETF (50%), small cap (20%), International (25%), Fixed Income (0%), and Cash (5%).
Of course, there are three more strategies between those two extremes.
You would re-balance every three or six months.
However, a buy and hold forever strategy that you hear about are not what I recommend. Read Ken Moraif’s book Buy, Hold, and Sell, to get you started with this philosophy. Why would you hold during a bear market and lose 50 percent of your portfolio’s value?
Learn about trend investing, to supplement your investment knowledge.
One of the key things to remember is that most of the “prophets” and talking heads of the media are just noise. Learn enough to make your own decisions.