5 Safe Investments in a Stock Market Crash
How to Manage Investments in a Recession
Recessions are a natural consequence of an over-heated economy and part of the business cycle. While investments may drop in value, the important thing to realize is that the stock market will recover in time. By taking time to make rational investment decisions in the face of a recession, an investor can come out of it better off than before. This article details several courses of action that can benefit savvy investors even when the markets take a turn for the worse.
Seeing the Big Picture
Don't immediately sell your assets.When stock prices begin to fall, it can be frightening to see your money slipping away from you. It may be tempting to sell these stocks, but most financial advisors agree that selling at the first sign of recession is a bad idea. For one, stock markets move several months ahead of the economy as a whole, so by the time you know there is a recession, your assets will likely have already decreased considerably in value.Additionally, trying to systematically sell off and buy assets at just the right time, while advantageous in theory, is well outside of the ability of most individual investors.
- It may also be tempting to base your actions off of records of past recessions. For example, you may see that tech companies rebounded well after the last recession and think to invest in tech. However, this is unwise, as no two recessions are the same.
Decide which investments to keep.Usually, large and established companies will have the know-how and capital reserves to weather a recession. Any investments in these companies are best left untouched, as they will likely rebound. The same is true for any high quality bonds, especially government bonds. These will likely increase in value due to decreased interest rates intended to boost the economy out of the recession.
- Other contra-recession investments include precious metals and investments in companies that produce staple goods (like food).
Decide which investments to sell.You may consider selling investments in what are known as cyclical companies or any companies that have large amounts of debt relative to their assets. Cyclical companies are those that rely on consumer confidence and discretionary spending to survive, like consumer electronics and luxury clothing. Recessions conditions mean that these companies are at risk for lower sales and lower profits, potentially leading to losses and bankruptcy. Similarly, companies with high ratios of debt to assets, also known as highly-leveraged companies, may be unable to pay off their debt during a recession.
Making Smart Investments
Invest in counter-cyclical stocks before a recession.These include companies that specialize in defense, consumer staples, and utilities. The fact that these companies provide necessities makes them less exposed to recessionary revenue drops.Counter-cyclical stocks should be part of a conservative portfoliobeforea recession. Buying them at the start or during a recession exposes the investor to losses as the economy recovers.
- Keep in mind that as the economy recovers, it may be a good idea to limit reliance on these stocks. These counter-cyclical companies will do poorly as investors and consumers turn to the fast-growing, cyclical companies. That said, these companies are still sound investments and will likely still build value in the long run.
Buy reliable government bonds.These investments are not only incredibly reliable and safe, but will also likely increase in value over the course of a recession. The most common type of high quality bond is the United States Treasury Bond, which carries virtually no risk.You may also consider High quality or Premium rated (AAA or AA) bonds. Certain foreign bonds may also be reliable enough to weather recessions. For more information on investing in bonds, see how to invest in bonds.
Invest in precious metals.Precious metals, particularly gold, are a good investment in a recession. During times of stability, investors are more likely to take chances on speculative investments and the price of gold will fall. However, when there is a recession, gold prices tend to rise, making them a good investment during a recession.
Consider buying into mutual funds or EFTs.Mutual funds and EFTs hold a diversified portfolio of stocks specifically designed to grow through varied market conditions. Because of the depressed value of stocks, a recession is a good time to buy into a mutual fund that will likely grow quickly upon exiting the recession.
- diversification is the risk management strategy in place with a large portfolio of security. Most investors cannot get the broad diversification in their portfolios that they can get from a mutual fund or ETF.
Double-down on your current portfolio.As long as you are still employed and making money as you were before the recession, consider contributing even more money to your portfolio of investments. Recovery will bring swiftly-increasing asset value and could earn you a lot of money, so it's best to invest as much as possible at this point.
- If you purchased your original investments for long-term, lower stock prices are an opportunity to buy at lower prices with the expectation that the stock price will eventually reflect the continued good performance of the company.
- Only double-down on those companies that you want to own long-term due to their good management. You do not necessarily want do double-down on of the stocks in your portfolio.
Don't leverage your investments.Leveraged investing, or buying assets with borrowed money, is an incredibly risky strategy in any market. During a recession however, that practice becomes even riskier, as companies that an investor chooses to invest in may unexpectedly experience a drop in stock price or, even worse, fail completely. In short, leveraging can magnify your losses as much as it can potentially magnify your gains and in the end you could lose everything by making the wrong call.
Preparing for Recovery
Reintroduce risk.As a recession draws to a close, you will begin to see stock prices returning to their pre-recession levels. This is the time to invest (or reinvest) in those highly-leveraged companies or cyclical companies that survived the recession. Like all investments though, these stocks will still carry risk and may not increase in value just because the stock market as a whole does.
Reassess your position.Consider evaluating your investments' performance through the recession. If some did not recover as well as others, give them more time to come back in price if you truly believe in the company and expect them to do well in the long-run. In addition, consider the effect that the recession may have on foreign markets if you hold any foreign investments. After all, we've seen a recession spread across the world.
Learn from your experience.If you were hit particularly hard by the recession, whether in the stock market or in your professional life, consider planning better for the next recession. For example, it's generally a good idea to keep about six month worth of expenses (mortgage, utilities, food costs, etc.) in a separate account in case you find yourself in hard times again.
QuestionI have heard of people losing their retirement accounts in an economic depression, how can this be prevented if there is another collapse like in 2008?Top AnswererPut together a portfolio of roughly 60% high-quality stocks and 40% high-quality bonds. Historically such a portfolio has done well and is unlikely to lose money, recession or not, given a time frame of at least ten years. The easiest way to fashion such a portfolio is through mutual funds.Thanks!
- Consult with a financial advisor before making any investments. In most cases, a certified, fee-based financial advisor can help you make investments appropriate to your situation, especially during a recession.
Video: How to Manage Investments in a Recession - Secured Options
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