Positioning your portfolio for a potential economic slowdown

Understanding current market forces can help you keep your goals on track.

High inflation, volatile stock and bond prices, and talk of a recession may have you wondering what it all means for your financial situation. Though no one can predict what will happen in the markets or the economy, there are moves you can make to help cushion the blow from an economic slowdown. 

What’s driving economic and market volatility?

Before delving into portfolio moves to consider, it may be helpful to explore what’s prompted the current market volatility and recession fears. 

Much of the volatility and high prices we're experiencing now reflect the COVID-19 pandemic and the response of policymakers and consumers. In 2020, the Federal Reserve cut interest rates twice to near zero. The goal was to soften the blow of pandemic business shutdowns by making money cheaper to borrow, thereby boosting consumer spending. The government also authorized direct stimulus payments to consumers and businesses to keep them afloat while the economy was locked down. 

The economic intervention worked—there was a recession, but it was brief. Still, shutdowns, low borrowing costs and the extra income from stimulus payments led consumers to buy more goods for their homes, leading to bottlenecks in the global supply chain, which, along with the COVID-19-induced labor shortage, resulted in a rise in prices. 

What’s more, businesses have been hiking salaries to attract workers, as many have retired early or left the workforce temporarily because of COVID-19 health concerns. Those higher paychecks have also helped push prices higher, fueling inflation. Higher gas prices are rippling through the economy as well, driven in part by higher travel demand and Russia's war with Ukraine. 

“All of that has meant a difficult start to 2022,” says John Canally, Chief Portfolio Strategist for TIAA, FSB’s Investment Management Group. 

Now seeking to curtail inflation, the Fed has raised rates three times this year as of early July. By making it more expensive to borrow money for goods and services, they hope to prevent the economy from growing too quickly. But many investors are selling stocks—in fear the Fed will overreach in these efforts and push the economy into a recession, causing stock prices to fall.  

“Both stocks and bonds are down this year, which investors aren’t used to seeing,” says Canally. Bonds are usually seen as the relative safe haven, but that is not the case now. Higher interest rates are driving their prices down as investors sell their existing debt to buy new debt offering higher rates. 

What investors should do now

Though a slowing economy is not a time for rash moves, Canally says, there are adjustments to consider as we enter a potential recession.

Resist the urge to sell investments: Investors should avoid trying to time the market by selling investments ahead of an expected decline. The safer bet is staying focused on your long-term goals.

As Canally explains, markets tend to "climb a wall of worry," by continuing to rise during times of uncertainty. The past ten years alone include a European debt crisis, Brexit, the 2016 election, tariffs, and the COVID-19 pandemic.  

"Many past events seemed like the end of the world at the time, but the market kept climbing," says Canally. "Over time the market can absorb these types of crises, and we think we'll power through this as well."

The Market's Wall of Worry

Markets tend to climb a wall of worry during times of uncertainty.

Markets tend to climb a wall of worry during times of uncertainty.

While it’s normal for market volatility to leave investors unnerved and thinking of selling, it’s important to seek guidance from a financial advisor first. 

"Everyone wants to have certainty," says Canally. "But if you sold investments today, you may be locking in losses in both stocks and bonds. In addition, holding cash investments pays you 2% or less in interest, so with inflation running at 9%, you're losing money. Also, you don't want to be sitting on cash when the rally comes." 

Ensure your portfolio is aligned with your risk tolerance: The recent volatility may have you realizing your investments are more exposed to risk than you’re comfortable with, and as Canally explains, even some conservative investors are experiencing declines they aren’t used to. TIAA clients fill out a risk tolerance questionnaire to help inform their portfolio. If you’re looking to recalibrate your risk—especially if your goals have changed or you have experienced a significant life change that impacts your timeline or plans—your TIAA advisor can review that information and your holdings to help you align your goals with your exposure to market swings.  

Rebalance your asset mix: Market volatility can also be a prompt for investors to rebalance. For example, if you originally allocated 70% of your portfolio to stocks, the run-up in equity prices over the past 10 years may have pushed that percentage up considerably. So if 85% of your portfolio is currently invested in stocks, it may be time to talk with your advisor about rebalancing. 

Nearing retirement? Stay invested in the market: "If you're ten years from retiring and still building up your nest egg, you need to plan for that money to last as long as 30 years in retirement,” explains Canally. “That means you still need the growth that investing in stocks provides.” 

He recommends holding a well-diversified mix of stocks and bonds that meets your risk tolerance, including a mix of equity and bond types, as different asset classes perform differently in different markets. A financial advisor can help you choose the right mix, as well as determine if you're on track to retire on time and how to turn retirement savings into income when you stop working. 

Consider loss-mitigating strategies: If the market does decline, investors should consider opportunities to minimize potential tax bills from long-term holdings. A strategy called tax-loss harvesting lets you sell off losing investments in order to offset capital gains elsewhere in your portfolio. Navigating timing and IRS rules can be complicated on your own, but a TIAA portfolio manager can handle tax-loss harvesting for clients on an ongoing basis, says Canally. 

Retired? Keep your income stable: Market uncertainty can be especially scary if you're retired and living off your investments. But according to Canally, taking advantage of guaranteed income sources creates a buffer. In fact, many retirees who weren't focused on guaranteed income throughout the decade-long bull market are reconsidering it now. 

Lifetime income creates a dependable income stream you can't outlive, using income-generating assets such as Social Security, a pension (if you have one) and fixed annuities. This guaranteed income stream can help ensure you meet your essential needs for 20, 30 or more years in retirement. 

Meet with an advisor: Even if we avoid a recession, recent market volatility means investors should sit down with an advisor to review whether they’re still on track with their goals, and ensure their financial plan is aligned with their risk tolerance and asset allocation. For those without an advisor, Canally said the recent uncertainty should serve as a wake-up call on the difficulty of navigating volatility and a potential recession on your own. 

Because everyone’s situation is different, there’s no set of one-size-fits-all portfolio moves. Talk to your TIAA advisor to see what steps make sense for you. 

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This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor's own objectives and circumstances.

Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser.