The following article by Certified Financial Planner® W. Ben Utley was published in Modern Medicine (formerly Medical Economics) on Jan 2, 2008 and is reproduced here in its entirety.
Just as our climate has seasons, so does the US economy. Growth in consumer spending and production warms the economy, bringing with it sunny financial conditions that often last three to six years. But slowdownsas measured by a shrinking gross domestic productlead to chilling recessions, each lasting an average of 10 months since World War II.
This January, it looks like an economic winter may soon accompany our environmental winter. The credit crunch that started with the subprime mortgage mess precipitated a decline in home prices that may burst the housing bubble. Weakness in the housing market usually dampens the overall economy. In my view, we could be on the leading edge of a US recession.
So, what can you do to help your investment portfolio weather the storm?
- Be balanced. Recessions hit stocks harder than bonds, which tend to do well during these economic storms. To smooth out the stock market declines that come with a recession, hold a balanced asset allocation-a blend of stocks and bonds (or stock funds and bond funds). The mix that's right for you depends on your financial goals and the rate of return you're aiming for in your overall financial plan.
- Diversify, diversify, diversify. In the last recession, during 2001, tech stocks got soaked while real estate shone brightly. But trying to call the next hot sector while dodging the doldrums isn't a good idea. It's smarter to own shares in companies of all sizes: growth and value, foreign and domestic. Seldom does everything go down at the same time.
- Think long term. The thought of losing money may make you nervous, but remember that recessions are short-term phenomena. While the worst recessions can last as long as two years, your personal investment time horizonhow long before you need to actually spend your savingsprobably spans a decade or more. Don't let short-term volatility blow away your long-term plan.
Like the seasons that control our weather, the cycle of economic change is a natural part of the climate for investors. So plan for the elementsboth fair and foulby investing in an all-weather strategy.