That’s one reason why Morningstar considers a balanced portfolio a good idea in various market environments, Benz added.
For investors seeking stability in 70% equities portfolios, she said, “the best ballast, the best category for a weakening economic environment, will be that high-quality bond portfolio. Very plain vanilla. I wouldn’t necessarily dabble in lower-quality bonds if I’m looking for ballast. That high-quality fixed-income portfolio with a heavy dose of government bonds is going to be your friend in a recessionary environment.”
“You don’t need to get fancy. In fact, I would look for the cheapest product that you can find. A total bond market index, for example, would have a healthy dose of Treasury bonds and other government-related bonds, which would tend to perform pretty well in a recessionary environment,” Benz said.
Cash: Yields Could Taper
Current high yields have made cash accounts appealing, and cash should hold its ground in a recessionary environment, according to Benz. On the other hand, she said she wouldn’t be surprised to see yields taper down.
“And, of course, if you’re buying any short-term security — cash or short-term bonds or anything like that — that’s the risk you face, that you’re having to see your bonds mature or see your CD mature and you’re having to reinvest in a lower-yield environment. That’s a consideration, I think, for people who might say, ‘I love cash today,’” Benz said.
“Just be careful because you do face reinvestment risk,” although inflation tends to cool in a recession, and “that’s less of a headwind for you as a cash investor then when inflation is high as it has been over the past year and a half or so,” she said.
(Pictured: Christine Benz)