How to invest heading into a recession, according to top-ranked advisors

How do you know if we're in a recession?

Investors have recently experienced some of the worst trading days since 2020.

Stocks tumbled in September on fears that the US Federal Reserve’s aggressive rate-hiking cycle will stall the economy, but with further rate hikes, slowing growth, geopolitical unrest and persistent inflationary pressures, it could be an extended period of uncertainty and market volatility .

And yet there are “opportunities”, even now, he said Ronald Albahary, a Chartered Financial Analyst and Chief Investment Officer of Wetherby Asset Management, which is ranked #20 on the CNBC FA 100 list of Top Financial Advisors for 2022.

Perspective is key, according to Albahary. “There are some relatively simple things investors can do to take advantage of this environment,” he said, “if you can see through the fog of negative sentiment.”

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“The Fed has made it absolutely clear that its number one goal is to contain inflation,” said Mark Mirsberger, chartered accountant and CEO of Dana Investment Advisors, #2 on this year’s CNBC FA 100 list — even if it means that “They’re putting us in a recession,” he added.

“Right or wrong, that’s where we’re going.”

Rick Keller, Certified Financial Planner and Chair of First Foundation Advisors, ranked #33 on the CNBC FA 100 list, also said he sees “the positive side” of the current climate. “It’s usually darkest before dawn,” he noted.

Keller relies on the “barbell approach” to hedge against uncertainty in the face of rising interest rates and the possibility that the market could drop another 10% or more.

The barbell approach is an investment strategy that aims to find a balance between risk and reward by investing in high-risk and low-risk assets while avoiding medium-risk options. Keller’s clients have half their fixed income allocation in long-dated bonds and the rest in shorter-dated maturities.

“If we see the market drop another 10% to 20%, that’s going to be an exceptional buying opportunity,” Keller said.

Here are three strategies the senior advisors are using to navigate their clients through the downturn:

1. Build a diversified portfolio

“If you’re 60% or 70% invested in stocks, reduce that to 40% or 50%,” Mirsberger advised. “The bond side can have more weight because there is less volatility and more opportunity.”

For stocks, stick to the best companies across a range of sectors. Look for “strong brands,” he said, “like Microsoft, Google, Amazon and Facebook — we still see value in these perennial growers.”

“The market sell-off was indiscriminate; quality companies will recover faster than others,” Mirsberger added.

The market sell-off was indiscriminate; Quality companies recover faster than others.

Markus Mirsberger

CEO of Dana Investment Advisors

Keller also advises clients to reduce exposure to emerging markets Stick to quality stocks and diversify.

“I want to stay very diversified here because at the end of the day it’s difficult to choose one sector over another and the prices are low enough,” he said. “If you think up three to five years, you’re going to make really good money.”

2. Focus on Fixed Income

Since the Fed hiked rates, US Treasury yields have skyrocketed. “The good news is that you can now generate income from your very conservative portfolio or treasuries,” Albahary noted.

This suddenly makes short-term, relatively risk-free government bonds and funds more attractive.

“Savers have been punished for 20 years,” said Mirsberger. “This is truly the first opportunity for what many would describe as an acceptable return without significant risk.”

Albahary agreed that investors should shift some allocations to fixed income.

“Fixed income investments, which have been ‘fixed’ rather than ‘income’ for far too many years, are becoming more attractive,” Albahary said. “You’re now getting 4% or more for a risk-free asset, that’s a pretty fat throw,” he added, referring to an easy win.

Both advisors suggest adding to your government bonds to ensure you get the best yields, a strategy that involves holding bonds to maturity.

3. Crop losses

To take advantage of the recent sell-off, consider banking those losses and using them to offset future gains.

“This is the time to reap those losses,” Keller said. “I see it like money in the bank.”

With tax loss recovery, you can offset investment gains and, if losses exceed gains, up to $3,000 in ordinary income. Anything left over can be carried over to future tax years.

“That puts a dollar in the pocket compared to 75 cents,” added Albahary.

Just be sure to avoid the “wash sale rule”: if you reinvest in a substantially identical investment during a 30-day window before or after the sale, you can no longer post the loss for tax purposes.

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