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How to Build a Crisis-Ready Portfolio

Posted by Jim Kantowski, CFP®, CPA on May 20, 2020

Over the last 20 years, we have endured three crises that have impacted our lives and our portfolios: the Tech Bubble, the Housing Bubble and Crash of 2008, and now COVID-19. We are often asked what to do during times like this, but the reality is that your portfolio should be constructed to deal with a crisis long before it happens.

Below are 6 actions to take to prepare your portfolio now and for the future.

1. Base Your Portfolio on a Financial Plan

Your portfolio should be based on your goals and objectives (e.g., retirement, second home, education), risk tolerance, and time estimates (when you would like to meet your goal). It should take into consideration the best and worst case scenarios and you should have a clear understanding of what you need to earn from your portfolio. This will establish a portfolio with a purpose. When a crisis hits you will have an understanding of why you invested the way you did and will be able to understand how your plans have been effected by changes in the market and how making changes will effect your plans in the future.

If you have been operating without a plan and are unsure of whether your portfolio is tied to your objectives, now would be a good a time to gain an understanding of where you are and what you need to do to reach your goals.

2. Diversify Your Portfolio

Make sure your portfolio consists of a mix of stocks, bonds and cash that is tied to the investment returns you need to reach your goals. Your stock portfolio should consist of a range of stocks across different asset classes (large, small, value, and growth) and across the world. Using low cost, tax efficient mutual funds or ETF’s will allow you access to thousands of stocks and remove individual stock risk from the portfolio. The same should go for bonds. Include a mix of short and intermediate term bonds and include both government and corporate bonds across the world. Having your money spread out among different industries and countries should give you some piece of mind that you will not lose everything even in a crisis.

3. Rebalance Your Portfolio

Rebalancing your portfolio is a systematic approach to buying low and selling high. It will help you maintain a consistent mix of stocks and bonds over time to ensure your portfolio does not get too aggressive prior to a crisis hitting.

If stocks go down, your portfolio will likely become over-weighted in bonds. This would be a good time to sell bonds and buy more stocks to bring your portfolio back into balance. In reverse, if stocks go up you should be selling and reallocating to bonds to keep your portfolio in line. Rebalancing helps take the emotion out of investing and creates a disciplined way of buying low and selling high and keeps your portfolio in line with your overall goals and objectives.

4. Have Cash on Hand

Having an adequate amount of cash on hand to fund a downturn for a period of time is important. This should relieve the stress of having to sell an investment in a crisis to fund expenses. It will give you some time to sit tight and make rational decisions about your investments.

5. Consider Other Investments

Don’t forget about other assets, such as your home, vacation property or insurance policy. If worse comes to worse, you may be able to supplement your needs with equity from your home or a life insurance policy. These assets are typically not considered for spending in a financial plan and could provide some relief in a worst case scenario.

6. Manage Your Expectations

Keep your expectations in check by using conservative investment assumptions and make sure your plan will work even under some difficult scenarios. Don’t chase returns when stocks are going up or panic and sell when they are going down. Spend within your means and understand you may need to adjust your timeframe or spending if a crisis hits.

What to Do Next

While the future is full of uncertainty, you have everything you need to build a portfolio to help you reach your goals and to be prepared for the next crisis.

Do you need a second pair of eyes on your current portfolio? We would love to help. Please email us at info@baypointwealth.com or schedule a free consultation.

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Topics: Financial Planning, Investment News