Is Your Portfolio Prepared for a Potential Wildfire?

In the decade since the global financial crisis, many investors have either actively steered—or ended up with—a large portion of their portfolios in investments tied to economic growth, namely stocks. However, as global growth begins to slow, Wylie Tollette, Head of Client Investment Solutions, Franklin Templeton Multi-Asset Solutions, thinks it’s a good time for growth-focused investors to do a portfolio check-up.

On April 9 of this year, the International Monetary Fund cut its 2019 outlook for global growth to the lowest level since 2009—the tail end of the global financial crisis (GFC).1 As a result, many investors may be wondering if slowing growth is likely to lead to a worldwide recession or repeats of the sort of volatility we saw toward the end of last year.

Although we do not see a high probability of a recession in the near term, we do think global markets entered a new volatility regime in 2018. Before last year, volatility had been relatively low after the GFC, due to measures taken by central banks to stimulate their economies. As that intervention slowly abates, we expect volatility to return to more normal “baseline” levels.

In our view, as overall global growth slows, uncertainty around predictions of forward interest rates, inflation and corporate earnings may increase. Since markets like certainty, we think volatility is likely to be higher in the next few years than it has been over the last few years.

Against this backdrop, we would urge investors, particularly those with larger portions of their portfolios tied to global growth, to consider three activities to prepare their portfolios for the potential return of what we’d consider as normal market volatility.

#1: Understand Your Time Horizon

In the institutional world, understanding your time horizon comes down to “asset liability management,” or making sure that you don’t have short-term liabilities and long-term assets, or vice versa. Said simply, what is the money for and when is it needed? If it is required sooner rather than later, one should consider that need in the asset allocation.

Investors nearing retirement with expected cash flow demands need to ensure they are setting themselves up for success by avoiding the forced sale of longer-term, growth-driven assets. Conversely, younger investors with many years before retirement have a longer time horizon. In that case, moderate market downturns might be their friend in terms of adding to their investments at lower price points.