Tips for protecting or slow growing a nest egg in a recession

by SeelyMatthew

If you think a recession is imminent, you can increase the percentage of bonds in your portfolio, such as Vanguard’s BND. When a recession hits and the market drops 30-50% you can liquidate those bonds and buy the general stock market. Historically, the market always recovers so you can look at the recession as an opportunity to profit.

Example 1 shows a conservative portfolio which limits upside. Example 2 shows an aggressive portfolio.

Example 1:

50% Stocks, 50% Bonds, $100,000 Investments (50% VOO or SPY, 50% BND)

1 Year Before Recession, Market increases by 10%

Stocks: $50k – > $55k

Bonds: $50k – > $53k

Year of recession, Market decreases by 40%

Stocks: $55k – > $33k

Bonds: $53k-> $56k (then sell) -> 0k

Buy stocks somewhere in dip -> ~89k (It’s gonna be impossible to time perfectly, but you have time to be patient while everyone is running around and freaking out)

Year after the recession, Market increase by 30% (Remember it would take a 66% increase to get to pre-crash rates, so this is a moderate recovery). I assumed you timed the market perfectly when liquidating your bonds.

Stocks: 89k-> $115.7k

More reasonable stock increase of 20% for imperfect timing: $106.8k

Example 2: 100% Stocks, $100,000 investments

1 Year Before Recession, Market increases by 10%

Stocks: $100k -> $110k (100% VOO)

Year of recession, Market decreases by 40%

Stocks: $110k – > $55k

Year after the recession, Market increase by 30% (Remember it would take a 66% increase to get to pre-crash rates, so this is a moderate-speed recovery).

Stocks: $55k-> $71.5k

Example 3 is not included. But the situation that has occurred to many people over the last few years is that they try to predict the “recession” and then limit the upside of their investments. If in the examples the recession came 5 years after the initial investment, a 5-year gain of 66% would make the loss of 40% neutral with the initial investment. Then the investor would likely have a recovery. IMO people as of late have a tendency to feel a recession coming, but recessions need a reason. To balance having upside and protecting yourself from loss, you can move around the percentage of bonds between 50% or 0%. In more bullish markets, people will have 10% bonds. However, if you think the market is going to crash, you can have 30-50% bonds based on your risk aversion. I have made some assumptions in this analysis that I think are reasonable.

TL;DR: Add a higher percentage of safe bonds if you think a recession is imminent.

TL;DR for fortune tellers that know the market will crash: Buy leveraged ETFs, such as SPXU, that short the market if you KNOW the recession will happen over the next 6 months for big profits.

 

 

h/t SeelyMatthew