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Personal Finance Portfolio Updates

How I Plan to Manage My Investments and Finances As Recession Looms

Calvin Lo

The US has just fallen into a bear market and many are anticipating more pain ahead, especially if the US falls into protracted recession. Inflation is still running hot all over the world. Even Singapore’s inflation just hit 3.6% in May, its highest in more than 13 years (read here). The US Fed is scrambling to raise interest rates to hopefully cool inflation without pushing the economy into prolonged recession (so-called soft landing).

My investment portfolio has taken a big hit and is deep in the red, especially my holdings in US stocks and what little crypto I have. Thankfully, SG stocks, REITs and bonds helped to offset some of that decline.

In this post, I’m sharing what I plan to do with my investment portfolio and finances in general in view of the tough road ahead.

Investments

I was listening to this podcast from FifthPerson, where they mentioned having a system and sticking to it, which resonated with me. You can listed to the full episode below, which contains many other great discussion points as well.

My somewhat arbitrary system to handle drawdowns also involves deploying cash in tranches, but in smaller increments. I use my % cash holdings vs % decline in indexes as guides or checkpoints to determine when to deploy cash and how much. The indexes used are S&P 500 (SPX) and Nasdaq 100 (NDX).

Here’s an example of my system in the table below. The numbers are by no means set in stone. This system also only applies to our Family Portfolio, not my Personal Portfolio (higher risk). If you’re interested, you can find more info on our portfolios here.

Cash position %
Index/drawdown-5%-10%-15%-20%-30%-40%
NDX25%23%21%18%13%8%
SPX24%22%19%15%10%5%

Right now, I believe SPX is down ~20% and NDX down ~30%, so my target cash allocation would be between 13-15%. However, my cash position now stands at 27%. The reason it’s so high is partly because this crash happened so fast, I haven’t deployed cash fast enough. Also, it didn’t occur to me before this that as my stocks decline in value, my cash holdings as % increases. So, even if I did deploy cash, I actually have to deploy a little bit more to hit the new target cash % as the market declines. Lastly, we had substantial cash infusion from bonuses paid out in late March.

I tend not to deploy more than 2-3% of portfolio worth of cash at a time and try to spread them out over a few weeks or months. So in coming weeks, I’ll be gradually entering the market to reduce my cash position. The only inadvertent upside of holding more cash is that the overall portfolio (stocks + cash) performance looks slightly better, but that’s just a consolation. In my opinion, cash should not be a big % of the portfolio over the long term. In anticipation of tough times ahead though, I don’t mind having more cash as dry powder in the short term.

For existing positions, I don’t plan to sell anything or make any major changes. I’ve already over the past 2 years pivoted the portfolio towards more growth-oriented stocks (worst time to do so I guess but it is what it is). Over the long term, I still prefer companies that can grow revenues, profits, and dividends organically, instead of through share buybacks or increasing payout ratios.

Just a short note on the Personal Portfolio. I’m at ~44% cash in that portfolio, and not buying much yet. I intend to wait for a potential reversal in momentum before adding aggressively. In the meantime, I’d probably just nibble opportunistically in either Tesla (TSLA) or Palantir (PLTR). If I feel the itch, I might put on some SQQQ (Short QQQ ETF) to try get some short term gains but not aiming for big profits there.

Finances

Our family has grown with the addition of our second child last year, so our expenses have increased in step. We don’t expect anymore big ticket items going forward besides one or two trips overseas with borders reopening. That said, I still think there’s scope to rein in some of our expenses.

With inflation making things more expensive and recession looming, I think it’s prudent to tighten our belts a little and put off some discretionary expenses where possible. We are neither particularly thrifty nor do we tend to overspend, so it’s just about increasing our savings rate incrementally without affecting our lifestyle too much.

Food. I would like to eat out less especially at restaurants, but that’s dependent on whether my wife has time and energy to cook and whether we are sufficiently stocked on groceries. That said, even if we eat out I think it’s prudent to eat at coffeeshops, food courts, or hawkers instead of restaurants. Our second child is also transitioning to solids, so his milk powder consumption will also reduce gradually. Higher food prices might also be a good motivation to start on my diet/intermittent fasting which I’ve put off since forever. One side effect of the pandemic is that I’ve gotten accustomed to snacking throughout the day especially at night (BAD!).

Transport. Despite 20-30% increase in fuel prices, our fuel cost has actually reduced slightly due to lower fuel consumption. The bulk of our fuel consumption was from my drive to work, so since I’m still working from home, our fuel consumption is still pretty low. This will change when I eventually return to office (my office location is pretty far and inaccessible), so I’ll have to figure out how to manage this cost. One way would be to walk/cycle/bus more especially for trips within the neighbourhood, but with the whole family it might still be more convenient to take the car.

Toys. With 2 kids and being stuck at home during the pandemic, we have resorted to buying a lot of toys so the kids don’t drive us insane. We got into toys for open-ended play, e.g. blocks, magnetic tiles, etc which are typically pretty expensive. Since we’ve built up quite a repertoire of toys (and run out of storage space), we should be naturally spending less on toys going forward.

In general, I intend to start tracking expenses better, which I actually don’t do currently. Currently, I split my expenses into buckets in dedicated bank accounts, so I do know if we are overspending in any particular category. However, I think there’s value knowing how our expenses trend over time and hopefully have some actionable insights from there. So corporate, I know.

Our family expenses are also set up such that we can survive on a single income in the unfortunate event one of us gets laid off. Of course that would involve more drastic cuts to discretionary expenses, e.g. kids’ classes, car, etc. I find that having a good idea of what’s essential and what’s discretionary expenses gives us confidence that we can go into survival mode pretty quickly if shit hits the fan.

Final thoughts

Whatever it is – inflation, bear market, recession – at the end of the day, life still goes on. Having your finances in order and making some adjustments to your plans and goals is great, but my focus still remains on my family, religion, and health. Money is just a supplement which supports us in our goals, not the other way round. So whenever I start to get anxious over investment losses and/or higher expenses, I try to remind myself that money can always be earned back.

Are you making any adjustments to your investments or finances in anticipation of a possible recession?

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