With the current global markets skyrocketing to all time highs, investors show no sign of pessimism for the future. However, we must keep in mind that the stock market is cyclical in nature, where sooner or later, the market identifies the earnings associated with the listed companies resulting in a market correction. A recession is inevitable and a majority of highly qualified professionals fail to predict it or provide any forewarning to investors in order to safeguard their investments.
Regardless of the use of a large number of complex financial models, it is extremely difficult to time the market at any given point. Browsing through the internet, you will also find theories that the stock market is a religious reflection of the Sabbath principle, where 6 days are for work and the seventh day for rest. This is translated to years and some parts of the world believe in a 7 year ‘Shmita cycle‘ with the stock market, where a recession is bound to happen on the seventh year when debts will be cleared. While I do not believe in this theory, my motive in mentioning this, is to prevent ourselves from being manipulated with various kinds of theories online. It is imperative to analyze all possibilities before making any irrational decisions.
Now that we can agree we do not possess the power to time the market (if you do, contact me right now! 🙂 ), it is important for us to safeguard our investments in times of difficulty. Here are 4 ways to harbor your wealth from the next recession:
1. KEEP CALM AND DON’T PANIC!
This is clearly the most important factor when investing in the stock markets. Analysts often refer to “market sentiments” when defining the rise and fall of the markets. In times of bear markets, it is easy to be carried away and flow with the tide. However, if you simply start selling all your investments, you will only find yourself at the bottom of your portfolio with heavy losses. Avoid giving in to the market frenzy at any given time and remain calm while you wait. If you are aware that your portfolio comprises of stable long term assets, you have nothing to worry. Acknowledge that this is a temporary phase and like the market upswing, the downfall too shall pass.
2. CHERISH THE OPPORTUNITY
If you are successful at keeping calm, then you will surely be able to identify a huge opportunity during difficult times. Realize that this is the ultimate mega sale on stock prices, where you can buy at the bottom and simply wait for the economy and markets to recover. While it can be hard to have faith in the markets when all you see is blood, this is your biggest opportunity to make great investments at the lowest buck.
You must keep in mind that this opportunity does not correspond to buying any stock available at the lowest price. Invest cautiously by understanding the fundamentals first. For example, DuPont is one of the oldest companies listed on the stock exchange, and realizing that this company has been stable through multiple recessions and recovered, is a sound investment to make. However, investing in recently listed companies with no stable financial track record would only lead to bigger losses. Research, research, research!
3. CONSIDER MUTUAL FUNDS AND BONDS
It may become increasingly difficult for you to pick individual stocks, when all you hear is “SELL EVERYTHING“, but a smart move would be to invest in a large cap index fund. Refrain from investing heavily into small cap only funds, as these assets are risky investments. Consider diversifying this investment in a long term growth fund where assets are allocated across multiple market cap companies. Understand how to start investing in mutual funds here
It is typically seen that during times when stock prices fall due to the economy slowing down, bond prices start rising. At such times the government often reduces the interest rates, thereby increasing the bond prices. Bonds are certainly considered a safe haven to protect your finances against losses in equity. There is always an alternative to hedge against your losses, and bonds can offer that safety net.
4. MAINTAIN AN EMERGENCY FUND
While stock investments are certainly more profitable than a vast majority of other options, you must maintain a fair amount of liquidity while you wait for the economy to recover. If you have all your money parked in one place, you may end up waiting a long time before you can recover your cash. Understand that you are in for the long term and do not expect the economy to change overnight.
Maintain a savings account with an estimated 6 months to 1 year worth of money to assist with your day to day expenses. For employees, the looming fear of companies downsizing will start to creep in, but this emergency fund will keep you at peace. Cut back on expenses or adding any more debt until you finally see the rays of another bull rally.
Tough times never last but tough people do ~ Robert H. Schuller
Be Frugal, Be Smart, Be Rich!