Though stock prices are at an impressively high point, signs pointing to a recession have prompted the wealthiest investors to take 5 crucial steps to protect their investments going forward, according to wealth management advisors like Ashley Folkes at Moors & Cabot, per an in-depth report by Business Insider. These 5 steps include: selling off bonds, stockpiling cash in order to increase liquidity, turning to ETFs as a shield from potential market troubles, paying down debt and playing it safe in the market. Ultra-wealthy investors have taken these steps even as other investors have occasionally moved in the opposite direction; while many investors have rushed to buy bonds, wealth managers are encouraging a sell-off as a result of the inverted yield curve which has decimated many bonds' value.
Steps to Prepare
In spite of recent stock market highs, prominent figures including Deutsche Bank Chief GLobal Strategist and Head of Asset Allocation Binky Chadha have pointed to increasing signs a recession is on the way. Chadha explains that his firm "would argue you want to be defensively positioned" and that "the U.S. equity market has run way, way ahead of growth," per a report by Barron's. Here are some steps investors may consider taking to protect their investments:
Sell Off Bonds
By limiting exposure to bonds, investors can also reduce exposure to interest rate fluctuations and general market turmoil. In a recession, these two elements will be abundant.
Boost Liquidity With Cash
In a recession, access to liquidity is essential. Keeping a more sizable proportion of your investments as cash holdings can help to limit overall portfolio risk and has the added benefit of providing a tool to capture investment opportunities that may be available at a bargain during a recession.
Embrace the ETF
For those investors who don't wish to give up too much of a stake in equities until a recession seems even more likely, index low volatility ETFs could be a good option, according to Folkes. Top-quality dividend-paying stocks with substantial histories of success may also be a safer bet.
Capitalize on relatively low interest rates by refinancing and paying off debts now, thereby allowing you to save more money.
Stop Trying to Play the Market
For all investors, ultra-wealthy or otherwise, a key to weathering a recession is to not game the system too much. Indeed, making too many significant changes to a portfolio can throw off risk tolerance, asset allocation and more.
Although a recent report by Barron's highlights "doomsday scenarios" including the ongoing U.S.-China trade war, the potential for major infrastructure damage as a result of cyberattacks, or widespread deflation, it's important to keep in mind that long-term investment strategies are typically designed to accommodate times of economic turmoil. Investors looking to follow the defensive strategies of the ultra-wealthy would be wise to keep that in mind before entirely upending an approach to investments.