By Christopher Cervantes, RFP
LAST December 3, The Dow tumbled by more than 280 points following United States President Donald Trump’s statement that the trade deal with China may be delayed until after the 2020 elections. On that same day, the Philippine Stock Exchange index slipped by more than 20 points. Despite our growing economy, many investors fear a recession could come by next year. Recessions don’t just come out of nowhere. And we don’t know if, or when, a recession will hit the Philippines. Even its severity, there is no way to predict the extent of the damage accurately. One metric to examine is the previous and recent recessions, which have ranged from six months and a year and a half.
Most investors who experience recession worry about not having enough cash on hand to cover their basic needs during a market slump. You could imagine your situation if all your money is tied in an aggressive investment such as the stock market. For this reason, many investors cash out their investment during bad times, even their money, which is supposed to be part of their retirement nest egg. Right now, many investors are considering cashing out their savings in an attempt to avoid similar losses. But in reality, even how noisy the market observer could be, no one knows what will happen in the next couple of years, let alone for the next 10, 15, 20 or even 30 years. Deciding whether to continue or delay your retirement investment due to this market noise would likely backfire, further hindering your ability to save and pushing the retirement date beyond your expected year.
If you are thinking about how to protect your retirement portfolio form a looming recession, stick to goal-based investment strategy. Below are some of the ideas that you may apply.
With recession or no recession, always be ready with ample cash. The most practical step that you need to do is to make sure that you have a fully-funded emergency fund. If you don’t have a three to six months fund for living expenses in the bank, now is the time to start doing it. If you want to have a smooth ride against this wave of misfortune, you can further increase that fund by ensuring a one-year emergency fund. Remember, recession doesn’t just end after six months.
It is also essential for you to focus on a well-planned budget — live by the checklist. If you can further reduce your living expenses, that is ideal. If you are planning on getting amortization for like a new house or car, it is recommended that you delay it for the moment until the wave of pessimism passes. If you are renting, try to find a more affordable property.
After managing your expenses and having lots of cash, continue accumulating more liquid assets in preparation for you to buy a better investment deal once the recession is happening. Falling markets present a better opportunity to invest in equity funds as you will be able to buy more shares at a lower price. It will add considerable value to your retirement account. You may also opt to rebalance your equity portfolio and transfer it in debt funds such as bonds, money market funds, and treasury bills. It is most advisable to those investors who cannot stomach the ups and downs in the market. Another option is for you to explore hybrid funds. Those investors who want exposure to both equity and debt can go for dynamic asset allocation funds such as balance fund. These funds take care on its own asset’s allocation as equity and bond allocation in funds keeps changing as per market conditions. Especially if you are a busy person and have limited market information, having this kind of fund in your retirement portfolio would help a lot.
Reducing your investment allocation for retirement is the worst mistake you can make during a recession. Remember, a recession will happen now and then. While things are happening, you are getting closer and closer to your retirement date. If you fail to invest for your retirement during a market slump, you missed the chance to buy investments at the lowest prices.
Since many Filipinos are becoming a fan of VUL (variable universal life) as a retirement vehicle, avoid cashing out from your plan, especially if it is within the year when exit charge is applicable. Most likely, the underlying fund of your VUL is equity or bond that is profoundly affected during recession, instead of cashing out, consider topping-up on your account. If you have enough emergency funds, for sure, you don’t need to touch it.
When it comes to managing your retirement, staying the course that you need to steer toward its attainment would help you avoid common recession pitfalls. Yes, it is nauseous to see how your account value declines tremendously. That’s why having a sound financial plan would help ease your suffering. By considering recession in your investment strategy, it’s possible for you not just lower the damage, but maybe even gives you a positive return.
