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Christine Benz

Portfolio > Portfolio Construction

3 Ways to Help Portfolios Get Ready for a Recession: Benz

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What You Need to Know

  • High-quality bonds tend to perform well in recessions, Benz said.
  • She suggested focusing on stocks representing items people pay for even in a recession.
  • Some equities that have performed well this year might underperform in a recession, Benz noted.

Clients may be asking how their portfolios can be protected from the economic slowdown that many market experts have been forecasting.

Christine Benz, Morningstar’s director of personal finance, recently posted suggestions on several ways investors can recession-proof their holdings, which advisors may want to review, too.

Clients thinking about repositioning for a recession or economic softening might consider high-quality bonds, as well as stocks focused on health care and consumer staples, Benz recommended in a video posted this week on

Girding for a slowdown may mean trimming positions in some investments that served clients well in this year’s first half and expanding others that dragged portfolios down during the market volatility. 

“The really tricky part of this recessionary talk is that the categories, the hardest-hit categories, some of them, especially in the fixed income space, are the things that you want in your portfolio in a recessionary environment,” she said. 

High-Quality Bonds

“High-quality bonds tend to be very, very good performers in recessionary environments, in part because recessionary environments typically spur a flight to quality, and high-quality bonds are one of the key high-quality investments that investors look to — but also because interest rates often decline in recessionary periods, which makes high-quality bonds worth more. It elevates high-quality bond prices,” she said.

Investors “might be inclined to throw bonds overboard given how poor their performance has been in the first half of 2022,” Benz said, but “they tend to be good ballast for equities in some sort of an economic weakness or recessionary environment.”

Benz cautioned against “drastic all-or-nothing measures with respect to your fixed income exposure in your portfolio,” suggesting that investors maintain “some exposure to high-quality bonds to protect you in a recessionary scenario.”

As for the complexion of that bond exposure, “I would definitely broaden beyond investment-grade corporates to encompass Treasuries and government-agency bonds as well,” she told ThinkAdvisor via email on Friday.

“Government bonds tend to be natural beneficiaries in the flight to quality that we often see during periods of economic worry and weakness. Moreover, they are the most interest-rate sensitive, so if lower interest rates eventually materialize, they’ll tend to benefit more directly from that action than other bond types,” Benz added.

Health Care, Consumer Staples Stocks

Some equity moves that could be helpful may also feel counterintuitive, according to Benz. She noted that commodities and energy stocks, which have held up well in this year’s rough market, could underperform in a weaker economy: “You want to be careful about overdoing them because of their sensitivity to the economic environment.”

Health care and consumer staples stocks, on the other hand, tend to do well in recessions, Benz said in her video.

“Anything that consumers will continue to buy regardless of what’s going on in the economy, so that’s paper towels, that’s drugs that people need to take, those tend to be quite recession-resistant,” she said. “They are things that you’d want to maintain ongoing exposure in your portfolio to.” 

Benz noted that economists and market-watchers have speculated about a possible recession, because the Federal Reserve has been aggressively raising the benchmark interest rate in its effort to curb high inflation. If they act too aggressively, she said, Fed policymakers “could overshoot and inadvertently push the economy into a recession or at least slow it down dramatically.”

How and When to Position

While Benz’s suggested investments may serve clients well, that doesn’t necessarily mean they should make sudden moves, Benz explained to ThinkAdvisor.

“My bias is for investors to not get too into maneuvering their portfolios in an effort to stay ahead of macroeconomic developments. Rather, it makes sense to maintain exposure to some of these defensive categories on an ongoing basis; they’re probably already in most investors’ portfolios,” she said.

“For example, health care is about 15% of U.S. total market indexes, and consumer-staples stocks are another 7%. Most investors, especially those who are within 10 years of retirement, also have exposure to U.S. high-quality bonds,” Benz explained.

“So my main message is — yes, a recessionary environment would probably not be great for your portfolio’s performance, but if you’re well diversified and not overexposed to highly cyclical stocks and lower-quality bond types, you’ll probably be able to ride it out just fine,” she added.

If investors feel cautious in anticipation of economic weakening, Benz suggested shoring up liquid reserves and emergency funds.

“I typically recommend that retirees hold one to two years worth of their portfolio withdrawal needs in cash on an ongoing basis; that way they’re not having to raid stocks or bonds when they’re down,” she said.

For people who are working, holding three to six months’ worth of living expenses in cash is a good baseline, but those in more cyclical industries, such as real estate brokers, should aim for a higher target, she added.

Tax Considerations

Any client portfolio moves may have tax implications.

“Investors should always take tax consequences into account when repositioning their portfolios, especially if the plan is to lighten up on securities that have appreciated substantially since purchase,” Benz told ThinkAdvisor.

“In general, it’s wise to take a more hands-off tack with taxable accounts to avoid triggering taxable capital gains, holding broad-market ETFs for equity exposure and limiting exposure to high-income producing securities,” she explained.

“Meanwhile, investors can feel free to reposition more actively in tax-sheltered accounts, where there are no tax consequences to making changes,” the Morningstar expert added. “That said, I like the idea of investors being quite hands-off there, too, engaging in rebalancing and portfolio maintenance just once or twice a year, or every quarter at most, as laid out in their investment policy statements.” 


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