Recession-Proofing Your Portfolio: Is Going All-In on Bonds the Answer?

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When the economy takes a tumble and stock prices plummet, it’s easy to second-guess your investments.

As volatility and uncertainty continue to reign in markets around the world, many investors are wondering if there’s a safer approach when it comes to protecting their portfolios against the ups-and-downs of economic cycles.

For years, people have assumed that buying bonds is a reliable way to safeguard their wealth during urgent times, but is putting all your eggs in one basket really the best option?

In this article, we’ll examine both sides of the debate on whether or not going all-in on bonds is an appropriate response for a recession-proofing portfolio strategy.

#1. Bonds Aren’t Risk Free

Man investors assume when they invest in bonds, they cannot lose money.

This is far from the truth.

The value of bonds change over time and if you sell before a bond matures, you can lose money.

It is important to know how bonds work so you can minimize your risk of losing money.

#2. Identify Your Goals

Before you invest in anything, you need to identify your goals.

Why are you investing in the first place? How long will you be invested? What is your risk tolerance?

Answering these critical questions will guide you when it comes time to select the investments that are right for you.

#3. Don’t Let Emotions Control You

When was the last time you make the right decision that was based purely on emotion?

Chances are it was never. And this is what does most investors in.

They allow their fear or greed decide to invest or not. You are your greatest enemy when investing. Have a plan and stick with it for the long term.

#4. Stick to Shorter Term Bonds

If you must put some money into bonds, it is recommended you stick with shorter duration bonds. In other words, bonds that will mature in five years or less.

These are less sensitive to changes in interest rates, which is important since the Federal Reserve might continue to raise interest rates.

#5. Auto Purchase During a Down Market

Here’s a response that discourages what the individual is considering.

This commenter advised, “If you are relatively young, a down market is a gift as your shares auto purchase new shares through dividend reinvestment for much lower from when you bought. Then when the market goes up again, your portfolio will be even more significant.

Never sell based on market conditions when you are young. You set an age-appropriate asset allocation and sit with it. You place your dividend stock to buy more shares with the paid dividend instead of cash.”

#6. Back In 2016

How did a similar plan to what the original poster is considering fare in the past?

A commenter who watched a friend do something similar said, “A good friend of mine went all bonds and cash in 2016 because “the market was too bull for too long,” and everyone was parroting the Recession. He thought I was crazy for keeping the investments going monthly without changing.

He finally bought back in – in late 2019 and sold on the Covid drop. I’m far, far ahead of him now with similar total investments. I timed nothing, made no changes, and have been 100% stocks, S&P, for over two decades. Good luck!”

#7. Don’t Worry, You’re Still Young

Finally, this comment was a reminder that the original person and his parents are in two different age groups and that his parents are moving toward retirement.

This canny contributor cautioned him, “Moving your portfolio out of stocks and into bonds is something you’d start to do within a decade of retirement, regardless of the state of the market.

If you’re still 20 or 30 years away and have another couple of boom-bust cycles to get through, as others have said, keep buying in slow and steady into general stock funds, and don’t try and be too clever. The S&P is 17% off its all-time high and is unlikely to drop much below 20% of its December 2021 peak unless there’s a global catastrophe. In other words, don’t worry too much!”

#8. Set Up A Play Account

Some investors take 5% of their money and actively trade with it.

This solves two problems. First, it gives them a sense of control, or an outlet for their fear.

They feel better making moves based on emotion.

The second issue it solves it that it shows you how bad you are at making investment decisions.

Most people who actively trade will lose most of this money. This is why you should only use 5% of your wealth.

Ideally, once you see that you did worse than the rest of your portfolio, you will be more inclined to ride out the market.

#9. Get Good Advisors

This plan is something that many people overlook. They don’t see the benefits of having an impartial mind considering everything for you.

A forum member stressed the need for this impartiality and lack of emotion in financial decisions.

They said, “You should hire someone to make these decisions. Hiring a financial counselor may seem silly as you can read and learn the same as a Financial Advisor.

Still, emotions can get in the way since you are human and dealing with your own money. You’ve mentioned several hazardous potential options when investing with your feelings. Go all to cash, face reinvestment rate risk, and potentially miss out on the upswing in the market.”

#10. The Future Isn’t Written

While many people have opinions on what will happen in the future, it’s impossible to be right 100% of the time. A person who does not believe in prognostication stated, “No human alive knows the exact direction in the market will move with 100% certainty—anyone who pretends to be foolish or lying to you.

Proper Asset Allocation, following modern portfolio theory, and investing for the long run are the ways to deal with that uncertainty.

There are zero guarantees that the stock market will become cheaper relative to bonds in the future, even if a recession does happen. We have witnessed a fair amount of inflation over the last year or two. Inflation means dollars are worth less; when that happens, the prices of everything – including stocks – will tend to rise.

Suppose there’s enough (and unpredictable enough) inflation that economic activity goes down. In that case, corporations become worth less, creating downward stock pressure, but that low pressure may not be greater than the upward pressure from inflation.”

#11. Paper Losses, Paper Wins

This wise person reminded the original poster of this bit of truth.

He said, “Remember, when your 401K dips, it is only a paper loss. When it goes up, it is only a paper win. The only time the price of any fund or stock counts is when you buy or sell it. Check your funds and be sure everything is smooth in there. If something goes under, then it will be an actual loss.

That is what they mean when they talk about the 2008 bailout. However, some of those guys should have gone to jail.”

#12. The Market Goes Up And Down

An important lesson that all investors have to remember is that the market goes up and down.

In the short term, these swings down can cause you to lose money. But over the long term, the market goes up.

This is why is it critical to take a long term view of investing.

If you are only investing for 5 years or less, there is a good chance you will lose money.

But if you are investing for 10, 20, or even 30 years, you will make money.

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