{"id":2921,"date":"2022-06-24T17:49:24","date_gmt":"2022-06-24T17:49:24","guid":{"rendered":"http:\/\/blog.valuengine.com\/?p=2921"},"modified":"2022-06-24T20:44:48","modified_gmt":"2022-06-24T20:44:48","slug":"re-allocations-of-etfs-under-the-specter-of-recession","status":"publish","type":"post","link":"http:\/\/blog.valuengine.com\/index.php\/re-allocations-of-etfs-under-the-specter-of-recession\/","title":{"rendered":"Re-Allocations of ETFs Under the Specter of Recession"},"content":{"rendered":"

With the S&P 500 now officially in bear market territory, a major specter hanging over the market right now is the prospect of recession.\u00a0 Many experts say it is now inevitable.\u00a0\u00a0<\/span>Morningstar\u2019s research legend John Rekenthaler explained in a column Thursday that this bear market does not necessarily portend a recession and I agree.\u00a0 An underlying characteristic of any recession is a surplus of supply without matching demand.\u00a0 That said, most experts and most investors seem convinced that a significant near-term recession is inevitable.\u00a0\u00a0<\/span><\/p>\n

Between the fears of the experts and a brutal first half in both the stock and bond markets in 2022, many industry colleagues and financial advisors spent a major portion of their time trying to explain that pulling money out of the markets altogether following a 20% decline is a very bad idea\u00a0 In some cases, it takes a while for some to grasp that the \u201csafety\u201d of keeping that money in a savings account earning less than 0.1% as inflation persists at 8% or more is not safety at all.\u00a0 It is the equivalent of locking in a loss of 50% in real dollar terms within 5 years.\u00a0 Therefore, even in a doom-and-gloom scenario where the bear market continues through the end of 2023 and the US GDP declines for four straight quarters, investors who anticipate needing to access part of their nest eggs within the next 3 \u2013 10 years are better of re-allocating current fund positions than divesting. Considerations and strategies for reallocation are the focus of this article.\u00a0\u00a0<\/span><\/p>\n

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First, let\u2019s briefly discuss investors who should not worry about reallocating.\u00a0 For money that is unlikely to be needed in the next 10 years, it probably would make sense to maintain allocations to funds and ETFs based first on capital appreciation and secondarily for income and low volatility considerations. For instance, someone for whom it was age and risk-category appropriate to own something resembling a 60% allocation to Vanguard Total Market ETF, <\/span>VT <\/b>and a 40% allocation to iShares Aggregate Bond ETF, <\/span>AGG <\/b>before the current bear market is probably best off ignoring the potential upcoming recession and maintain the current course.<\/span><\/p>\n

Investors not in this situation may wish to consider shifting some funds away from growth-oriented ETFs such as <\/span>VOO <\/b>and <\/span>QQQ<\/b> to more all-weather ETFs.\u00a0 At the end of 2021 when fears of recession were surfacing, Investopedia published an article about what types of stock ETFs to own and not to own for investors expecting an economic recession.\u00a0 Based on history, the article offered the following advice:<\/span><\/p>\n