Wealth is an incredibly interesting prospect. We’re made to make informed decisions hoping for the best outcomes. I have to think about money market accounts, how much to keep in my savings account, what past performance means to me, and I need to ensure that whatever interest rates I get on my investments are aligned with my goals in the long run.
Take 2022 into consideration for example. Thanks to the Federal Reserve and the rate hikes, market forces caused a stock market downturn that was painful for many investors. Even those using brokerage services often found themselves in a position of pure confusion and worry.
Thankfully, it doesn’t need to be that way. Contrary to what some may believe, economic downturns are not the end of the world. Sure inflation rises and your cash may seem like it’s diminishing before your very eyes, but there are steps you can take to help.
That’s why I’ve put together this easy-to-digest, yet informative piece on how to go about investing before a recession, so that when one hits, you aren’t in a terrible place.
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What Will I Learn?
- Don't Build a Portfolio Around a Single Instrument Such as the Stock Market
- Take Advantage of Fixed Income Instruments
- Consider Known Lucrative Investment Options
- While Liquidity Is Important, Avoid the Pitfall of Too Much Cash
- Do Economic Research
- Manage Your Emotions Well
- Wrapping It Up
Don't Build a Portfolio Around a Single Instrument Such as the Stock Market
Whether in a recession or otherwise, this is something you should never do. I often find that younger investors or those who may be new to investment markets are the ones that make these mistakes.
Never put your eggs in one basket, regardless of how lucrative the said basket may look. It’s great to have investment accounts dedicated to stocks, but there are also other valuable assets out there you can capitalize on.
What about real estate or commodities? Remember that market volatility will often create financial uncertainty around certain instruments. The best way to protect yourself is to be in a situation such that one failure is not the end of the world.
Take Advantage of Fixed Income Instruments
A diversified portfolio doesn’t necessarily mean a risky one, but many dismiss the idea of going the conservative route.
Consider the hikes that have come our way, thanks to the Fed. One thing it means for us is greater Treasury yields. What do you think that says about short-term Treasury bonds? Suddenly, the risk is virtually non-existent.
Now you have a situation where savers, who were traditionally the less fortunate ones, can maintain the lack of significant risk, while still accessing acceptable returns.
Consider Known Lucrative Investment Options
I think this one goes without saying. Regardless of the strength of an economy, inflation is a pretty normal thing. Will you necessarily see a significant decline in the purchasing power of your cash? Maybe not. Inflation can even be negative, as rare as that may be.
Still, it’s essential to formulate a strategy that keeps you above it. Long-term investments are highly recommended here and should form a part of your portfolio.
Does that mean nothing can be done in the short term? It most certainly does not! Consider these instruments, which can be a great addition to your portfolio, especially in times when inflation gets problematic.
It’s always essential to understand how interest rates work with the bonds you choose. Take the US Treasury savings bonds, for example. The rate is fixed, however, it is adjusted for inflation once every six months.
You can use these as both short and long-term opportunities. While it may earn interest for 30 years if you’d like it to, you can cash out in five with no risk of penalties.
Dividend Paying Stocks
Stocks are very common because of their known earning potential. Of course, the possibility of seeing losses is great too, especially if the investments made are less than stellar. I’ll tell you now that of all the options here, this one carries the most risk.
However, there are strategies that you can use to help. Dividend stocks, for example, come highly recommended. This is a source of passive income to look forward to. The idea is to pinpoint those that see consumers offsetting costs.
It means they are in a position where a market meltdown will have less of an impact on profits. Utility stocks are a great example.
On this note, you could also consider a stock index fund. Going that route gives you exchange-traded funds (ETFs) or mutual funds as options, which create a situation in which you have some level of risk protection from inflation, thanks to the diverse investment nature of the instrument.
Precious metals, such as silver and gold, have been used as strong investment vehicles for a very long time. They provide an excellent hedge against inflation considering that their value isn’t tied to any Fiat currency.
I’m a strong believer in using your retirement for investing in metals, as are these three billionaires who invest in gold.
What this means is that you could have a situation where the dollar is sliding and your investment in gold appreciates.
Here’s what I want you to keep in mind. There is a finite supply of gold on the planet. It’s not cash that allows us to print more. Therefore, its value commands an innate level of strength.
While investing in gold alone may not make your portfolio recession-proof, it’s certainly a great place to start. You can invest in different ways too, such as buying the precious metals directly or setting up a precious metals IRA.
Also Read: Gold IRA vs. Physical Gold
Real estate has been and will likely continue to be a superb investment option. In fact, I would say that as far as investments go, you should keep real estate high on your list.
Specifically, I would suggest looking into residential real estate. Consider that the industry has grown an average of 4% since 1991. How is that for covering inflation?
Bear in mind that purchase and maintenance costs may mean not seeing the kind of profit you want for some time, but it’s still a very solid choice.
While Liquidity Is Important, Avoid the Pitfall of Too Much Cash
I can’t tell you how many times I’ve heard the statement “cash is king.” Don’t get me wrong as cash is nice to have, but it’s a terrible idea to get caught up in just having it. Contrary to what some may believe, there is such a thing as too much cash, and you don’t want to be one of the people who is caught on the wrong side of the tracks.
Strong balance sheets come from a mixture of assets. Let’s take a moment to go through a couple of the advantages and disadvantages of subscribing to this “cash is king” way of thinking.
On the advantageous side of the fence, we have:
You get to be liquid, which can help to navigate the payments you may need to make during a recession.
With interest rates being hiked, money market options and savings will see benefits
Cash accounts don’t have too much risk
Having cash means being able to get in on opportunities in a heartbeat
Now, what about the downsides? Let’s take a quick look:
Discipline is always going to be the standard for how much cash a person can retain
Inflation is going nowhere, which means you’ll see the purchasing power of your holdings on the decline right before your eyes
Insurance limits are a thing. As you accumulate more cash, the amount of protection you have becomes more limited
Having cash means it’s sitting idle, and you may be missing out on something elsewhere
Don’t get me wrong. I think having some amount of cash is good. For example, an emergency fund is always a great idea. However, your savings account probably shouldn’t be the only thing you have.
Do Economic Research
I cannot emphasize this piece of the puzzle enough. You need to be doing your own research where wealth management is concerned. Topics such as growth stocks, real estate investment trusts, interest rate changes, etc., are a few that you should wrap your head around.
What assets are out there? How do different market factors affect them? There’s only so much and no more that I can tell you here. The rest is up to you.
Investment strategies are meant to be subjective. I may be more risk-averse than you are, which means you would probably limit your potential returns by investing the same way I do.
Manage Your Emotions Well
There’s no doubt about the fact that recessions can be incredibly panic-inducing. Even so, it’s essential to remain in control of yourself to come out OK on the other side. Here are a few things to pay attention to:
Seek a good investment advisor to help you
Setup an emergency fund
Don’t deviate from the long-term plan
Volatility is inevitable but you shouldn’t let it keep you up at night
Remember that historically, there have been more good investment years than bad ones
Wrapping It Up
The nature of a recession can make it a confusing time, but that doesn’t mean that it needs to throw you for a loop. All I’ve said above is to help you stay on the comfortable side of things.
However, if I were to select the most important takeaways, it would be to ensure you have a diverse portfolio and to do your research so you invest from as informed a standpoint as possible.