How to Invest during a Recession?2011 Nov 7
Usually, if the economy is in bad shape novice investors will just stop investing. The good thing about a contracting economy is that experienced traders and investors see that such volatility can also be a great time to invest. How? A good investor can translate a bad market to profits. Even the U.S. claims that even the global market is in shambles, you should not panic. Here’s what you have to do.
When investing, risk tolerance depends on many personal characters but the main for the person is age. Younger tend to risk more while older investors are more careful.
If you are in your 20’s then there is no reason to panic at all. Perhaps you just started with your investment and since you are still young you have lots of time to make up with your losses. Focus on paying your debts with highest interest. Save, save, save; invest in conservative stock funds if you feel ready for them. Start investing in less-risky investment and wait for the increase when contracting of the economy will slow down.
If you are in your 30’s the best way to invest in a contracting economy is to prioritize first your retirement savings. Yes, a bad economy may also mean unemployment. So to protect yourself from being unemployed, save. You can move your portfolios to less risky bonds and not to high-risk stock markets. You may also consider exchange traded funds until the market is in good shape again.
If you are in your 40’s, again prioritize your savings. Do not just abandon your stock markets with the fear of losing most of your assets and investment. Do not go overboard by stashing all your savings. Have a truly diversified portfolio, find the best places to invest with low risk, cut down your spending, and do not take big bets on risky investment.
If you are in your 50’s continue saving and keep your investments balanced. Do not pull out all your money in the stock market but do not pay too much in investment either. You still have 15 more years to make up whatever losses you may create today until you reached your retirement age. Keep saving and find ways how to boost your savings no matter how small they are.
You see no matter in what age group you belong do not panic. A good investor knows when to spend less and when to save more. A bad economy may mean great losses but if you don’t panic and if you save, and invest in less risky investment then you will see a contracting economy is not too bad for investments after all.
Of course, those are just a rough guidelines and age alone cannot be the only determinant of your asset allocation. There are plenty other factors that shouldn’t be ignored.
How to Profit from Bear Market
Well, it is not necessary in every recession we have to face a bear market. It is very expected to have bear market when economy is contracting for two quarters in a row (it is a classical recognition of a recession), but bull market also can be a case.
Usually when economy drops it affects a confidence of investors and it causes bear market which ends only when confidence of investors and consumers (normally those are related) recovers. So when it happens it brings a turnaround in the markets.
But until it happens we have to know how we can profit from the bear market. Well, there are two main positions in investing: long position and short position. Long position means that investor is holding the assets and profit from price increases of it while short position (the name comes from ‘short selling contracts’) means that investor has financial instruments that allow for him to make profit when prices of the object falls down.
So what are those financial instruments that allow us to make profit from bear market? There are several main securities: short selling contracts, put options and futures that can be easily acquired in the market.
However such derivatives wouldn’t be advisable for investing beginners because those are really risky. For example short selling may bring unlimited losses if yours prediction will be false and price of the stock will jump very strongly. Losses then may be massive. It is really very dangerous.
Sometime’s is better stick to traditional investment strategy than to try profit from a recession market (some says that is a catching of a falling knife) and burn your money slowly or quickly with all those fancy financial instruments.
The Beginning of Investing During a Recession
So what you should do then? Better not to try making profits quickly in every market more. It is better to have a complete investment strategy which includes all the possible market movements in every direction and to panic when it happens. You have to know what can happen and be ready for it. Have to know what you can afford and seek for it.
Good fundamental diversification should let you reach more efficient results.
If you are only beginning with yours investments then you have to be extra careful. The most effective tool for you might be very simple: a time diversification when you investing not all the amount immediately but spread it over some period, for example every half of year you are putting one fourth of your portfolio in active markets and other part are held in money market investments or similar.
During bear market most of the stocks are losing their value and there is not much to do about it if ignore above mentioned financial instruments. Diversification also helps until some level, but now all the markets are so closely related that almost all of are moving together just as reeds under the strong wind.
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