FA 100: How to invest heading into a recession, according to top-ranked advisors

Advisors

Investors have recently witnessed some of the worst trading days since 2020.

Stocks took a dive in September over fears the Federal Reserve’s aggressive rate hike cycle will cause the economy to stall, but with more hikes to come, along with slowing growth, geopolitical unrest and persistent inflationary pressure, this could be a prolonged period of uncertainty and market volatility.

And yet, there are “opportunities,” even now, said Ronald Albahary, a chartered financial analyst and the chief investment officer of Wetherby Asset Management, which ranked No. 20 on the CNBC FA 100 list of top financial advisors for 2022.

Perspective is key, according to Albahary. “There are some relatively easy things investors can do to take advantage of this environment,” he said, “if you can look through the fog of negative sentiment.”

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“The Fed has made it perfectly clear that their No. 1 objective is to squash inflation,” said Mark Mirsberger, a certified public accountant and the CEO of Dana Investment Advisors, No. 2 on this year’s CNBC FA 100 list — even if it means “they take us into a recession,” he added.

“Right or wrong, that is where we are going.”

Rick Keller, a certified financial planner and the chairman of First Foundation Advisors, ranked No. 33 on the CNBC FA 100 list, also said he sees “the upside” to the current climate. “It’s usually darkest before dawn,” he said.

Keller relies on the “barbell approach” to hedge against uncertainty in the face of rising rates and the possibility the market could still pull back 10% or more.

The barbell approach is an investing strategy that looks to find a balance between risk and reward by investing in high-risk and low-risk assets while avoiding more middle-risk options. Keller’s clients have half their fixed-income allocation in long-term bonds and the rest in shorter-term maturities.

“If we do see the market come down another 10% to 20% range, it will be an extraordinary buying opportunity,” Keller said.

Here are three strategies the top-ranked advisors are using to steer their clients through the downturn:

1. Build a diversified portfolio

“If you were 60% or 70% in equities, reduce that to 40% or 50%,” advised Mirsberger. “The bonds side can carry a greater weight because there is less volatility and more opportunity.”

As for stocks, stick with the best companies across a range of sectors. Look for “strong brands,” he said, “like Microsoft, Google, Amazon and Facebook — we are still seeing value in these perennial growers.”

“The market selloff has been indiscriminate; quality companies will recover faster than others,” Mirsberger added.

The market selloff has been indiscriminate; quality companies will recover faster than others.
Mark Mirsberger
CEO of Dana Investment Advisors

For his clients, Keller also recommends reducing exposure to emerging markets, staying with high-quality stocks and diversifying.  

“I would want to remain very diversified here because, in the end, it’s difficult to pick one sector over another and the prices are low enough,” he said. “If you are thinking out three to five years, you’re going to make some really good money.”   

2. Focus on fixed income

Since the Fed has hiked rates, Treasury yields have soared. “The good news is now you can get income from your very conservative portfolio or Treasurys,” Albahary said.

That makes short-term, relatively risk-free Treasury bonds and funds suddenly more attractive.

“Savers have been punished for 20 years,” Mirsberger said. “This is really the first opportunity what many would say is an acceptable level of return without much risk.”

Albahary agreed that investors should shift some allocations to fixed income.

“Fixed income, which has been more ‘fixed’ than ‘income’ for far too many years, is becoming more attractive,” Albahary said. “You are now getting paid 4% or more for a risk-free asset, that’s somewhat of a fat pitch,” he added, referring to an easy win.

Both advisors suggest laddering your Treasurys to ensure you earn the best rates, a strategy that entails holding bonds to the end of their term.

3. Harvest losses

To take advantage of the recent sell-off, bank those losses and use them to offset future profits.

“This is the time to harvest those losses,” Keller said. “I think of it like money in the bank.”

Tax-loss harvesting lets you offset investment gains and, if losses exceed gains, up to $3,000 of ordinary income. Anything left over can carry forward to future tax years.

“That puts a dollar in your pocket, versus 75 cents,” Albahary added.

Just be careful to avoid the “wash sale rule:” If you reinvest in a substantially identical investment during a 30-day window before or after the sale, then you can no longer book the loss for tax purposes.

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