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Markets & Strategies

4 Ways to Help Position Your Investment Portfolio Ahead of a Market Downturn

Strategists at Wells Fargo Investment Institute share key considerations for adjusting your portfolio.

January 16, 2020

The U.S. economic expansion had lasted 128 months as of December 2019, making it the longest expansion in recorded U.S. history since the mid-19th century. The S&P 500 Index simultaneously has sustained the longest bull market on record, gaining nearly 380% on a total return basis.¹ But the sheer length of these two runs has heightened investors’ anxiety—surely, they presume, the good times must soon end.

As stated in the recent report “2020 Outlook—A Call for Resilience,” Wells Fargo Investment Institute (WFII) strategists believe low interest rates should prevail in the coming years, and investors may need to adjust income-generating strategies as a result.

Rather than exiting the equity market late in the cycle, WFII strategists recommend you make the following four portfolio adjustments for investing ahead of a downturn:

1. Diversify to help mitigate risks.

Qualified investors may want to consider broadening exposure to alternative investments, including hedge funds and private capital.2

2. Manage cash during periods of volatility.

Instead of holding large quantities of cash, deploy it selectively as markets pull back.

3. Rebalance portfolios.

This long economic expansion may have created a much higher equity exposure than originally desired in many portfolios. Rebalancing back to strategic targets can help prepare your portfolio for a market correction or economic downturn.

4. Know what you own.

Investor sentiment can outpace fundamental value late in a cycle. If expected returns look too good to be true, they probably are. “Know what you own” also means accounting for overlapping exposures or concentration risk. For example, some growth-oriented equity funds were not as diversified as they seemed in the late 1990s because growth-oriented equities as a group became overvalued.

Additional Resources

WFII strategists offer five tips for positioning your portfolio in the face of mixed economic signals.

¹“Market Charts, First Quarter 2020,”  Wells Fargo Investment Institute, January 2020

2Alternative investments, such as hedge funds and private capital, are not suitable for all investors and are only open to “accredited” or “qualified” investors within the meaning of U.S. securities laws.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this article was prepared by the Global Investment Strategy (GIS) division of WFII. Opinions represent GIS’ opinion as of the date of this article; are for general informational purposes only; and are not intended to predict or guarantee the future performance of any individual security, market sector, or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this article. Wells Fargo & Company affiliates may issue articles or have opinions that are inconsistent with, and reach different conclusions from, this article.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to any particular investor or potential investor. This article is not intended to be a client-specific suitability analysis or recommendation; an offer to participate in any investment; or a recommendation to buy, hold, or sell securities. Do not use this article as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon.

All investing involve risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Asset allocation and diversification are investment methods used to help manage risks. They do not guarantee investment returns or eliminate risk of loss.