Investment strategies to consider during an economic downturn

July 23, 2020 6:07 PM

An intelligent and well-calibrated investment strategy can not only save you from monetary losses but also enable the building of a healthy long-term portfolio.

investment tips, investment tips for risk-averse investors, COVID crisis, fixed deposits, FD, FD laddering, Sovereign Gold BondsIf your income has remained unaffected, a recession is also a unique opportunity to invest at lower prices.

As the world sinks into a severe economic recession, predicted to be the deepest since World War II, individuals are recalibrating their financial decisions. As incomes stand threatened, major spending decisions have been put off, real estate sales have taken a beating and investments are being re-assessed.

Economic recessions are mostly a cyclic phenomenon that is either sparked by the need for market corrections or are fuelled by such Black Swan events as the COVID 19 outbreak. Recessions invariably result in a steep fall in revenues for companies and job losses across sectors. When confronted by such situations that threaten your regular income, it is only but natural that you should tread cautiously on investment decisions. However, if your income has remained unaffected, a recession is also a unique opportunity to invest at lower prices.

An intelligent and well-calibrated investment strategy can not only save you from monetary losses but also enable the building of a healthy long-term portfolio.

Here are a few investment strategies that individuals must consider:

Assess your current investments and consider re-allocating assets

As a first step, you must thoroughly assess your current investments and analyze their long term viability. The sudden steep downturn and the crashing of the stock markets might make several of your assets appear devoid of value right now, but this doesn’t mean that all of them must be disposed of. Most companies have been affected in the short term and their stock values have dipped. However, a recession being a cyclic event is not likely to stay on forever. The stocks that have sufficient credibility, credit security, and a good long term outlook will definitely bounce back sooner or later.

Delineate investments that appear to have a poor future and consider re-allocating the latter. Selling stocks at a loss is not a prudent choice at any given time. You can leave your money safely parked in safe assets even if they are underperforming in the near term. A key indicator of long term stability inequity is an assessment of the company’s balance sheet. If you are invested in companies that have good cash flows and are without any significant debt, you can rest assured. However, if your stocks are in companies that have high operating leverage coupled with poor cash flows, you may consider pulling out.

Diversify your assets

Having assessed your portfolio thoroughly, you now need to cushion it against severe losses by diversifying your investments into multiple baskets. If your money is parked in a lot of stocks, which is making you lose your sleepover market fluctuations, you must disinvest a part of it to invest in other areas.

Diversification of investments is always a good strategy but it is particularly important during a recession. Consider putting a part of your money in commodities, exchange-traded funds (ETF) which are themselves a diversified basket of securities, fixed-income funds, and hedge funds.

Make part of your investment recession-proof

A recession invariably reduces the appetite for risk-taking. This is why it is important to turn a part of your investment into portfolios that do not bring in too much market risk. You must always have some safe money to fall back to. Cash is an important element in reducing the volatility of your portfolio. Cash allows you to earn low but safe interest money while also giving you security against any unforeseen financial catastrophes such as a job loss.

Shift a part of your money to simple cash deposits and fixed deposits. Investing in consumer staples is also quite a risk proof strategy as such stocks mostly weather recessionary pressures. Real estate is another area that is most lucrative during a recession given the drop in prices. If you have a cushioned source of income, investing in real estate can be highly rewarding at this moment. But make sure you do not pick up a very heavy loan.

Look for high-quality stocks

High-quality stocks might be too costly to trade in normal circumstances. However, a recession or a bearish phase offers a rare opportunity to purchase such stocks at a relatively lower cost. Many investors start fleeing and disposing of stocks irrationally when hit by a recessionary phase and falling share prices. Look for grabbing such an opportunity.

Include precious metals in your portfolio

Unlike stocks and equities, precious metals such as Gold and Silver are considered a safe long term financial asset. Often, as stock markets fall, the value of Gold is seen to increase. In the near term, both the metals might behave differently according to different recessionary pressures, but if you want to park a part of your money into a safe long term asset, precious metals may be just that. Investing 5-10 per cent of your portfolio money into precious metals reduces portfolio volatility over the long term.

by, Vivek Bindra, Founder & CEO, Bada Business

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