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Many investors worry that a recession is looming amid rising interest rates, high inflation and stock market volatility. But the majority haven’t changed their portfolios, according to a study by Fidelity Investments.
Just 5% of 401(k) and 403(b) investors changed their asset allocation in the second quarter of 2022, according to the report, down slightly from the 5.3% who made changes in the previous quarter.
Among savers who made adjustments, the majority of investors made only one, with the biggest change involving switches to more conservative investments, the results show.
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That’s not surprising given that many 401(k) investors use target date funds, a “set it and forget it” option that automatically and gradually shifts the investor’s allocation to more conservative assets as they near retirement approaches. These changes are not part of the stated 5% loyalty as the fund makes the adjustments.
In fact, according to Vanguard, 95% of 401(k) plans offered target date funds in 2021, and 81% of participants used those funds.
However, if you want your portfolio to reflect concerns surrounding the economy, here are some options to consider.
Consider a switch to commodities
While there may be limited inflation hedging options in a 401(k) plan, investors in other accounts may have more choices, said certified financial planner Bill Brancaccio, co-owner of Rightirement Wealth Partners in Harrison, New York.
His firm began shifting client portfolios last summer, anticipating higher inflation with the possibility of higher interest rates. “You have to change trains before the train leaves the station,” he said.
If we have persistent inflation, commodities are a really good hedge against it.
Bill Brancaccio
Co-owner of Rightirement Wealth Partners
A “broad basket of commodities,” including energy, materials and metals, typically 3% to 10% of the total portfolio, has been a good addition, he said.
“If we have persistent inflation, commodities are a really good hedge against that,” he added, noting that assets could also do well if interest rates rise.
How to position your bond allocations
While many advisors have built portfolios to withstand volatility, do-it-yourself investors may still have room for improvement, said CFP Anthony Watson, founder and president of Thrive Retirement Specialists in Dearborn, Michigan.
For example, you should consider the so-called duration of your bonds, which measures sensitivity to changes in interest rates. Expressed in years, the duration takes into account the coupon, the time to maturity and the yield paid during the term.
“You want to make sure your bonds have shorter durations,” because if rates go up, you can reinvest the proceeds sooner to earn more, Watson said.
And you should make sure there is “quality bond exposure,” including so-called investment-grade bonds, he said, which generally carry lower risk because the issuer is less likely to default.
While market interest rates and bond prices move in opposite directions — higher interest rates cause values to fall — these assets still play a key role in portfolio diversification during prolonged downturns, Brancaccio said.