6 Ways to Prepare for the Next Market Decline

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The U.S. economy is putting up some impressive numbers in GDP, jobs and wages, but many pundits fear that a slowdown is pending. Trade-war fears with China and the European Union remain front and center in the news. And the yield curve is threatening to invert, meaning short-term interest rates may be moving higher than long-term rates. That’s often a sign of pending recession on its own.

By some measures, the current expansion is now 10 years old, making it one of the longest on record. That seems ancient, but there’s no rule that says it can’t continue. Australia is in its 28th consecutive year of economic growth.

Even so, all good things do eventually come to an end. And for the U.S. (and for Australia, for that matter), economists are looking for slowdowns. Even the Federal Reserve has indicated it is ready to lower short-term interest rates to combat any problems that may arise.

Professional investment managers may look to sell a good deal of their holdings to step aside as the market falls. However, for most individuals, timing the market by selling when conditions seem dicey, and buying back when conditions firm up, is a big mistake. Even the pros don’t always get it right, and they have armies of analysts and rooms full of technology at their disposal.

Quick test

Here’s a quick test: Any stock that hit a 52-week low in April or May as the Standard & Poor’s 500 hit a 52-week (and all-time) high probably will not fare well on a market swoon. The same goes for stocks at 52-week lows at today’s highs.

Just remember that this is a tweak of your portfolio. You are not timing the market, pe se, because you will remain largely invested.

Portfolios benefit from owing a percentage of bonds or other fixed-income investments. While bonds typically do not offer the same capital appreciation potential as stocks, their relative price stability and income streams can offset weakness in stocks.

One rule of thumb for a diversified portfolio across different asset classes is 55% stocks, 35% bonds and 10% cash. Of course, this will look a little or very different depending on your risk tolerance and how close you are to retirement.