Due to rising interest rates, soaring inflation, and stock market volatility, many investors are concerned about an impending recession. Fidelity Investments’ analysis indicates that the majority of people have not altered their holdings.
According to the research, just 5.3% of 401(k) and 403(b) investors made modifications to their asset allocations during the second quarter of 2022, which is a small decrease from the 5.3% who did so the previous quarter.
The statistics suggest that the majority of investors among savers who made changes only did one, with the most frequent move being a switch to more conservative investments.
It shouldn’t come as a surprise, given that many 401(k) participants choose so-called target-date funds, a “set it and forget it” option that automatically and gradually changes the investor’s allocation to more conservative assets as retirement draws near. Due to the fact that the modifications are made by the fund, they are not included in the 5% Fidelity mentioned.
According to Vanguard, target date funds were really provided by 95% of 401(k) plans in 2021, and 81% of participants used them.
Here are some ideas to think about, though, if you want your portfolio to reflect concerns about the economy.
Take switching to commodities into consideration
According to Bill Brancaccio, a certified financial planner and co-owner of Rightirement Wealth Partners in Harrison, New York, investors may have more alternatives to hedge inflation in other accounts whereas possibilities may be more limited in 401(k) plans.
In anticipation of greater inflation and the potential for rising interest rates, his company started rebalancing customer portfolios last summer. “You have to make changes before the train leaves the station,” he said.
A “broad basket of commodities,” which normally makes up 3% to 10% of the total portfolio, has been a good addition, according to him. These include energy, materials, and metals.
“If we’re going to have persistent inflation, commodities are a really good hedge against that,” he continued by pointing out that as interest rates rise, the assets might also do well.
How to allocate your bond portfolio
Despite the fact that many advisors created portfolios that can endure volatility, do-it-yourself investors may still have opportunity for development, according to CFP Anthony Watson, founder and president of Thrive Retirement Specialists in Dearborn, Michigan.
The so-called duration of your bonds, which gauges their sensitivity to interest rate swings, is one factor to take into account. Duration, which is expressed in years, takes into account the coupon, the remaining period till maturity, and the yield received.
“You want to make sure that your bonds are lower in duration,” Watson explained that this is because you may reinvest the money sooner to earn more when interest rates are rising.
Additionally, you should make sure there is “high-quality bond exposure,” including so-called investment-grade bonds, according to him, as these are often lower risk due to the less likely occurrence of issuer default.
Bond prices and market interest rates move in the opposite direction—higher rates cause values to decline—but these assets are nevertheless essential for diversifying the portfolio during protracted downturns, according to Brancaccio.
