How do Investors Prepare for a Downturn?
How do Investors Prepare for a Downturn?
Of course, every investing strategy is different. For some investors, when they feel a recession is about to hit, they cautiously to monitor the market landscape for safe, high-quality assets. To prepare for economic uncertainty, they re-evaluate their portfolio in case an unexpected event occurs. The best investing strategy during difficult times is a very personal decision, and really depends on your risk tolerance.
Generally, most investors stick to three different strategies: continuing to invest in equities, taking money out and keeping it in cash, or diversifying with safer investments like CDs, real estate, and high interest savings.
Staying the course and investing in equities
Equity markets generally serve as a big indicator of the state of the economy, and when markets decline it is expected that the economy will go into decline soon after. While many people are inclined to give up on stocks, there are often a handful of sectors that continue to have steady returns and may be something you look into. Even though markets may drop sharply, there will always be some areas of the markets that may outperform, which include healthcare, utilities, and consumer goods industries. Since people will still need to spend money in these areas, these stocks could be a lot less volatile relative to the overall stock market.
Additionally, it may be smart to look into high dividend yielding stocks. Dividends can lower the amount of time needed to regain your losses from an investment. This is because reinvested dividends during market crashes will generate large profits when the market rebounds. Dividend stocks are also a lot less volatile and generally fall less than non-dividend equities.
Keeping your money in cash
In times of economic uncertainty, you never know how your financial situation can change. In order to prepare, it is important to keep cash or cash equivalents to ensure you have enough liquidity. This way, in the case that you lose your job or are unable to pay bills, you will have access to some disposable income. Although you won’t get any returns on your money this way by missing out on investment opportunities, you won’t be losing any money either.
Diversification is even more important during economic downturns, and diversifying your investments will provide as a buffer just in case one of them leads to large profit loss. CDs are a safe investment people like to invest in because you will be guaranteed to make 2 or 3% over the time your account is opened. Even though the interest rate is very low compared to other investments you could make, it’s a very safe way to keep your money. Similarly, high-interest savings accounts offer the same amount of security for your money as CDs.
Another great opportunity during recessions is investing in real estate. During recessions many properties will be heavily discounted and have large profit margins, making real estate a prime opportunity. In order to do so, it is important to have funds ready to purchase real estate as soon as the recession hits so that you are ready to make a deal once the time is right.
Evaluating Your Financial Health
Doing a financial wellness check before a downturn is very important. To determine if you need to make any adjustments, determining your net worth and reevaluating your portfolio are some good steps you can take. You can sign up for a $35 coaching call with one of our coaches here.
Determining your net worth is the first step in assessing your financial wellness, and is a great indicator of where you stand financially. By seeing how your net worth is increasing or decreasing over time, it can help you determine how you’ll manage your money when the economy is slowing down. The next step would be to reevaluate your portfolio and seeing if you’d like to reposition yourself so that you have a better buffer against any potential losses.
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