The stock market has been rocky the last few weeks, and many can feel tempted to pull their money out. Yet, it is almost impossible to predict whether the market will crash, when it will bounce back, and how it will perform long-term. Should you choose to pull your money out and the market rises in value, you will end up losing some gains. If you decide to wait and stock prices take a turn for the worse, you will lose your money. Fortunately, there are some things you can do to protect your investments and preserve your wealth.
Tip 1 – Play Dead
The best thing you can do during a bear market is to invest in securities with short maturities and high liquidity. Such securities are, for example, municipal notes, treasury bills, certificates of deposit, and other market securities issued by large corporations, financial institutions, and governments. Other securities with high liquidity are repurchase agreements, commercial paper, and banker’s acceptance. In general, any debt of less than one year is considered short-term and offers investors the chance to make at least a modest profit.
Tip 2 – Diversify Your Investment Portfolio
Building a portfolio of cash, bonds, stocks, and alternative investments is the key to diversification. How much to allocate to each asset class depends on your investment goals, time horizon, and risk tolerance. As a rule, a balanced portfolio consists of corporate bonds (25 percent), AAA-rated government bonds (25 percent), small-cap stocks (25 percent), and dividend-paying blue-chip stocks (25 percent). A medium-risk portfolio is made of 40 – 60 percent equities while a high-risk one – 70 percent upwards. If you choose to build a high-risk portfolio, however, you should prepare mentally for quite a bit of exposure.
In times of recession, it is smart to invest in safe securities and shun riskier holdings. Consider this as an opportunity to rebalance your portfolio, sell some equities, and invest in bonds or cash equivalents such as money market funds, CDs, and treasury notes. Should you choose to invest more heavily in stocks, it is best to opt for high-quality, established companies with a strong balance sheet and a long business history. Such companies have proven they can survive an economic crash and thrive afterward.
Tip 3 – Buy Stocks in Defensive Industries
Non-cyclical or defensive stocks offer consistent earnings and dividends regardless of how the market performs. Defensive industries generally include companies, products, and services that are least affected by market fluctuations, whether recessions or expansions. Examples are industries that produce non-durables, including utility, consumer staples, and healthcare. Healthcare covers long-term care facilities, hospitals, clinics, suppliers and manufacturers of medical equipment, and pharmaceutical companies. Consumer staples are still bought during periods of declining economic performance. Examples are personal and household products, beverages, food, and packaging. Utility companies supply electricity, natural gas, and water which are needed during all stages of the production cycle.
As a rule, the defensive industries are less volatile and provide substantial long-term returns. Defensive stocks are also more resilient in times of recession or expansion. During expansion periods the economy operates above potential, and there are substantial inflows of cash. Most consumers will spend the extra cash on luxury items and experiences and not on necessary goods. This makes defensive sectors relatively stable during periods of economic growth. They are also relatively immune when the economy is in recession because the goods they produce are still considered essential by consumers. They will still need food, water, and electricity but will deeply reduce or eliminate treats, expendables, and postponables such as consumer electronics, clothing, arts and entertainment, and restaurant dining.
Tip 4 – Open a Fiduciary Account
A fiduciary account is a type of a deposit account managed on behalf of and for the benefit of the principal. Mutual funds often have investment teams that will allocate your assets so that they generate high returns. All you have to do is identify your goals, decide on the amount you are willing to invest, and open an account with them.
Tip 5 – Quit the News
Reading the latest headlines, watching finance-related news, and monitoring daily market movements will not help a great deal unless you are an investment professional with extensive experience. Stock prices and market movements are hard to predict, and financial forecasts have zero value if you have no or little experience.
Tip 6 – Reach Out for Professional Advice
If you feel your emotions are drifting in the wrong direction, maybe it is time to seek out professional advice. A financial advisor can help you review your short- and long-term goals and investment approach. They will help you stay on track and offer advice about investing in specific ETFs, mutual funds, bonds, and stocks.
Tip 7 – Pay Off Debts
If you have a large amount of debt, you may want to pay off at least a portion of what you owe. It can be more difficult to pay debts during a period of recession, so it is best to start with high-interest debts such as home equity lines of credit and credit cards. If feasible, you should also try to pay a good portion of your mortgage as paying off debt is never a bad move.
Lastly, it is important to get the basics right. If you haven’t started yet, you should take steps to save for retirement. Also, consider opening an emergency fund so that you can handle unplanned and unexpected expenses such as car repairs, vision or dental care, or serious illness. Buy adequate life and health insurance to safeguard yourself and your family should you need long-term treatment. Having adequate health coverage ensures that you get the best healthcare treatment without throwing your family into dire financial straits.