The fear index, the VIX, has spiked to its highest level since the 2008 recession as the market’s uncertainty hits a high. Due to the current global pandemic and financial circumstances, some investors are starting to fear another recession in the near future.
A number of factors could cause a recession, including lowered consumer confidence, which is often due to a negative series of events that cause consumers to delay spending. A fall in consumer confidence was a big factor in the 2008 crisis and is an issue we are currently experiencing.
While we may not be able to predict for certain the economic future, now is a great time to plan ahead and decide on an investment strategy. It is more important than ever to handle financial fears and make money moves with a smart, level head.
Investing During a Crisis
Investing during a crisis can be risky as the timeline and scope of recovery for the crisis is often uncertain and unpredictable as it relies on government decision making. It is important not to succumb to fear and anxiety and avoid selling stocks if you don’t need to. Stocks are a financial matter, so it is important to not overreact and keep your emotions out of play. Remember, eventually, the market will bounce back.
A study done by Ned Davis Research Group assessed 28 global crises over the past 100 years, covering events from the German Invasion of France in World War II to the terrorist attacks on 9/11, found that each time markets overreacted and fell, they recovered shortly thereafter. Those who sold out of fear found themselves having to buy back their portfolios at a higher price than they had cashed out for during the crisis. By recognizing that markets tend to overreact, a smart investor can purchase stocks and other assets at bargain prices.
Make the Most of Your Opportunities
Warren Buffet has famously given this investment advice, “Be fearful when others are greedy and greedy when others are fearful.” Investors can buy assets that have been driven to low prices by those selling out of fear for cheap, almost like they are on sale. It is important to remember that profiting from some of these investments will require discipline, patience and enough liquid assets available as the returns may take a while to see.
Low-Risk Investments Only
During times of crisis, it is more important than ever to avoid investments in companies that are highly leveraged or speculative and avoid taking any major risks during this already uncertain time. Instead, focus on companies that have good cash flow and low debt.
When choosing new investments, go to the consumer staples, or essential items that people will need and buy, regardless of financial situations. These include food, beverages, alcohol, certain household goods and even tobacco. Additionally, distinguish non-cyclical, recession-resistant industries, or those that consumers will spend money on year-round. These are not reliant on the time of year or current economic conditions and are often more stable. Focus on industries offering goods and services that are in constant year-round demand, like grocery stores, cosmetics and funeral services.
Recessions usually lead to drops in home values, which means you may be able to buy a property at a lower price and sell if for a large profit when prices rise back up after the economy and markets have recovered. This type of investment is definitely long-term and should only be considered if you are able to manage without a return on your investment for a few years.
Precious metals, such as silver and gold are particularly well-known for retaining value during periods of uncertainty and recession. Because of this, they are generally a safe investment, no matter the current economic climate.
Diversify
This is key advice for investing, no matter the circumstances, but is especially important during unpredictable financial times. Make sure to choose investments across different industries to help protect from greater loss if a particular product or industry loses value.
While investing across industries is crucial, it is equally important to make sure you are diversifying across asset classes. Having a combination of stocks, bonds, cash, real estate and commodities will help ensure protection to your portfolio.
Keep Investing for Retirement
During times of financial crisis, you have to keep the focus on the long term. The markets will eventually recover and your retirement fund will bounce back. Markets are volatile, which is exactly why you should have money in cash, savings and bonds to help through hardships. This money is your safe money. If you are worried about your retirement investments, a calming exercise is to add up your “safe money” and calculate how many months of essential living expenses it could cover.
While managing your investments during times of financial uncertainty may seem scary, it is critical to remember that eventually, the market will return to normal. When the masses fear and sell, it often increases the harm of the financial crisis and leads to even bigger problems. By maintaining a level-head and keeping emotions like fear out of your financial decisions, you can benefit from other’s fear and make the most for your financial future.
To learn more about Guy Gentile and DayTraderPro visit https://daytraderpro.com.