Investing is a good way to ensure that your money is working hard for you and not just sitting in a savings account. The more time and effort you put into learning about investing and the stock market, the better off you'll be. As a result, you might be able to retire earlier while meeting your other financial goals.
However, with a global recession, it may be hard for you to secure your financial standing and investments. During this period, the economy slows down, unemployment rises, professionals lose their jobs, and some even have to sell their properties.
Luckily, this article lists down things you can do to protect your money and investments during a recession.
1. Don’t Overestimate Your Risk Tolerance
It's easy to overestimate your risk tolerance when investing. For instance, you might find yourself investing in an asset class that doesn't match your ability to withstand losses. In turn, you could end up losing money in a safe asset class that doesn't provide sufficient returns.
Rather than overestimating your risk tolerance, you should invest in safe investments that provide regular income until the economy improves. For example, gold has historically performed well during shaky economic times; therefore, if the country ends up with negative interest rates, it would become an attractive option. To assess whether this option is right for you, you may consider browsing credible sources to view gold prices during great depression.
2. Expand Your Investments
The risk of putting all your money in one investment option is that you could lose all your money. If that investment loses value, you would be unable to recover the losses by selling other assets. In addition to losing your entire portfolio, you may also suffer tax consequences if you sell an investment before it has appreciated enough to offset capital gains taxes.
When investing during a recession, it's best to diversify your holdings. For example, if you own a house but also invest in stocks and bonds, then when the housing market goes down, your stocks and bonds may go up because fewer people are competing over them as well. After that, you should also stick with a few reliable investments that have historically done well in recessions and downturns.
3. Buy Penny Stocks
When the economy is bad, there will be fewer buyers for stocks than usual. It means that the prices of cheap stocks will be relatively stable compared with more expensive stocks that may have wild swings in price. If you buy at the right time, you could end up with a stock that has a lot of upside potential as well as downside protection.
When buying penny stocks, you must diversify your portfolio by investing in multiple companies. This strategy is helpful when times are tough because there’s less competition among stocks and, therefore, more opportunities for gains. Similarly, you shouldn’t overpay for growth stocks because they tend to be volatile, making them risky during recessions when people are more conservative and prefer safer investment options like bonds or cash equivalents.
4. Avoid Day Trading
The risk of day trading during a recession is that many stocks are already down significantly, so there may not be much room for them to go lower. If you buy at a high price when the market is already down, there's a chance that you might not be able to get out of your trade before it goes even lower. Aside from that, if the value does go lower, you could lose money quickly.
So, if you’re a day trader, it's time to put your trading on hold. Instead of day trading during a recession, you must buy stocks that have fallen in value and hold them for the long term. This strategy works well in most recessions because stocks tend to fall in value due to economic uncertainty, which means there are plenty of opportunities for bargain hunters like yourself.
5. Invest In Defensive Stocks
Defensive stocks are companies that have a low risk of bankruptcy and sell products or services that people need, no matter the economy. These stocks can help you protect your portfolio during a recession, but they don't offer the same growth potential as more aggressive investments. In addition, they’re considered as safe bets because they’re not vulnerable to economic downturns, unlike other industries.
If you want to invest in defensive stocks during a recession, then look for companies with low debt levels and lots of cash on hand. Those companies will be able to ride out the storm without having to fire workers or shut down factories just because they don't have enough cash in the bank. However, while defensive stocks may be less volatile than other types of investments, they don't provide much upside potential during an economic recovery either.
In a recessionary atmosphere, you must make certain that your investments are safe. Protecting your investments will help you to retain more of your initial investment money while keeping potential losses from further depleting those dollars. Therefore, you may consider these five practices, so you can secure your funds and reduce your losses.