By Sidhavelayutham M
Stock market enthusiasts have been hearing the words US recession popping up regularly over the last six months. Everyone seems to agree that some kind of recession is imminent in the United States. So what exactly is a recession and what should investors do to manage their portfolios when they find themselves in the middle of one?
A recession is a sustained period of declining GDP that extends for over 6 months. It has negative connotations that include job losses, lesser job availability, increased government stimulus etc.
The Federal Reserve has been hiking interest rates in a bid to tame inflation which is threatening to go out of control. However, this stokes the fears of recession. How do investors deal with this difficult situation? Should they stay invested or move to cash?
The best advice for Indian investors in the US Stock market would be to rebalance their portfolios. They should continue to buy and hold stocks and bonds. They should choose low-duration debt funds. Buying the dips in selective stocks will be a good strategy. Although growth has taken a hit, investors should focus on cash-generating companies.
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Investors often get frustrated looking at their declining portfolios during a recession. If they are invested in good quality dividend-paying stocks, there is no need to worry. In fact, they can look at accumulating good quality stocks on dips. Investing during a recession is not for the faint-hearted as they will not show overnight returns. Investors are advised to cherry-pick stocks and go with the best ones in a staggered fashion. They can use this period to reassess their portfolio and exit bad performers that are not expected to do well in the future. Stick to top-quality stocks for peace of mind for they will be the first ones to rebound.
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They should make sure that they have enough savings to cover living expenses over three to six months and invest surplus funds only. Investors should be prepared to hold this portfolio for 5-7 years to get the best returns. Logging into the account every day and watching your portfolio decline is not a pleasant feeling and is an activity best avoided. Instead, diversify your portfolio. Move some funds to debt funds and bonds and wait out this period calmly. There is always light at the end of the recession tunnel. It is prudent to wait it out instead of making rash decisions that will end up throwing out the baby along with the bath water.
Timing the market is an impossible task but those who invest during economic downturns usually make good returns when the tide turns. The Covid-19 pandemic low is the most recent case in point. Anyone who put their money to work during that period saw 2.5 x returns within a year. History has similar examples from 2007-2009, the 2001 recession fuelled by the dot com crash and 9/11, the 1990-91 recession and more. Instead of feeling pessimistic, use the recession as a time to rebalance your portfolio and stay in there. As they say, it is not timing the market but time in the market that matters in the long run.
(Author is Founder & CEO, Alice Blue)