The best tips and tricks to protect your investments during a recession.
Between rising inflation, cost of living, increase in layoffs, gross domestic product drop, reduced consumer confidence, a bear market, and a deflated economy, experts are predicting that the global economy may soon be heading towards the unavoidable: the notorious R word, recession.
According to Pierre-Olivier Gourinchas, International Monetary Fund (IMF) Economic Counsellor and Director of Research, the outlook of the global economy has “darkened significantly since April, and the world may soon be teetering on the edge of a global recession, only two years after the last one.”
Collectively, a Bloomberg survey by economists in July this year also concurs that the median probability of a recession over the next 12 months is 47.5%, up from 30% in June.
The immediate knee-jerk reaction to such news is to cash in and halt—if not most—all ongoing investments. After all, there is some inherent risk in investing and it would be unfortunate to watch your hard-earned money go to waste when its value plunges.
A recession is when a country’s gross domestic product has fallen over two consecutive quarters. Against the global economic backdrop, experts are predicting that a potential global recession may happen, if not inevitable, in 2023.
Despite this, cashing in should be the last thing on your mind right now. Instead, learning how to protect your investment portfolio to minimise losses, should be your immediate goal. Here are some ways you can ensure your investments are secured and safe:
Stay invested, don’t panic or rebalance your portfolio—just yet
Stay in the investing game, don’t panic!
Though recession predictions are looming, it doesn’t mean you should start panicking and not planning.
Now is the time for you to formulate a plan, factoring in the challenges that may come within a bear market.
Jot down your finances and your investments, and map out a financial plan bearing in mind the probability of worst-case scenarios.
For example, if you lose your job or face a health scare in the next year, what would be your backup plan? Do you have an emergency fund as backup?
Related: Halal Investment: A Beginner’s Guide
Though it may seem counterintuitive, rebalancing your portfolio—when investors buy and sell investments to restore the original asset allocation—sounds like a safe idea, this should be the last thing you do during a market sell-off because it locks in losses. When the market looks bleak, it’s best to hold on to your investments. Rebalance once the market finds a footing and evens out.
If you realise you can’t handle the volatility, you could rebalance into a slightly more conservative portfolio to manage your stress levels.
Of course, more traditional investments like mutual funds or unit trusts may require the help of a fund manager, but digital investment platforms like robo-advisors could help you rebalance digitally by weighing your risk tolerance.
Diversify your portfolio to protect your investments
A good diversification strategy is a portfolio that consists of several asset classes such as stocks, bonds, REITs, and mutual funds, among other things.
The phrase “don’t put all your eggs in one basket” succinctly describes this point. Corbin Blackwell, a senior financial planner with Betterment, shared an interesting perspective on diversification, he said, “Good diversification is having different areas of the market that don’t behave the same”.
When you diversify your portfolio, you not only can afford more lucrative investments but also spread the risk across multiple investments or asset classes, thus protecting your assets when the market dips.
Consider investing in both foreign and domestic investments rather than sticking to one asset class from one specific country. When a portfolio is spread across the globe, you are less likely to be hit by economic downfalls when the market in that region contracts.
Instead of putting all your money in the stock market, consider buying a combination of various assets such as bonds, shares, and commodities.
You can also diversify your portfolio by adding a mixture of small to large companies spread across multiple industries and sectors.
Invest regularly—but keep costs low
Halting your investments is probably the worse thing you could do when the economy is slowing down. When prices are dropping, that’s probably the best time to purchase stocks at a cheaper price.
Though it may be tempting to stop or check for investment opportunities before investing, the truth is you won’t know when the exact “right” time would be.
Continue investing, but cushion the blow by keeping your costs low. For example, if you would typically invest RM400 per month, you could, alternatively, invest RM200 a month over some time until you feel more comfortable splurging.
Automate your investments to ensure you maintain that consistency. Regularly investing saves investors from potentially failed investments.
Lookout for cheap stocks or “buy the dip”
During a recession, a good strategy is to buy cheap stocks that have the potential to grow exponentially.
When the economy looks bad, stock prices drop, which may look bad on the surface, but this could also be a good opportunity to buy stocks at a bargain price.
This technique will require you to plough through hours of financial sheets and financial analyst reports to look for undervalued companies that could prosper in the future. These tend to be quality companies in sectors hit by the economic downturn but can weather the storm.
Here you are not exactly timing the market perfectly, which is almost impossible. Instead, you are looking for low-risk opportunities with high potential or looking for investments within a price threshold that you feel comfortable with.
Save more than you spend—maintain an emergency fund
The safest option is to have both savings and an emergency fund.
This goes without saying, but saving is one of the essential aspects of personal finance and wealth building.
Saving money creates a sense of security, and peace of mind and provides you with the opportunity to live a quality life.
Before you start investing, you should at least put aside 3-4 months’ worth of your salary for an emergency fund, and at least try to save 30% of your income in your savings bin.
There are tons of other ways to start saving money, but we’ll drop one tip for now which is to try clearing off your debt as soon as you can considering how monthly debt payments eat up most of your money when it comes to saving. Debt robs you of your income! So, it’s about time you get rid of that debt. Once your income is freed up, you can finally add more of it to achieve your savings goals.
Choose investments wisely
Before investing, you must factor in your investment objective to get a better sense of your investment appetite and risk tolerance. If you are going to invest for the long-term, a little short-term loss will be less impactful than if you are investing for the short-term.
But to get a better sense of what types of investments are suitable for you, you need to understand your motivations behind investing. Are you investing for retirement? Or maybe to purchase a house?
Let’s say you choose to invest in stocks, the next move is to do thorough due diligence on the company you are investing in. Look through the balance sheets, business models, and financial analyst reports.
During a recession, it makes more sense to, for example, invest in a company that produces products or services that are relatively undeterred by the economic cycle, businesses that provide consumer staples such as supermarkets that provide consumer staples. Invest in sectors or industries that will prosper regardless of the investment climate.
Collect your dividends
If capital gains aren’t possible due to market downfalls, an alternative is to be on the lookout for dividends, which you could reinvest to buy more shares.
Unlike capital gains, dividends are likely to continue or be resumed during a bear market. Good dividend stock companies usually have no debt and a healthy pipeline of cash.
Play it safe to protect your investments
Are you risk tolerant? A recession may force investors to be more risk-averse.
As a refuge from volatile stock markets, many investors may be considering holding more money in corporate bonds or conservative assets like gold, which is seen as a hedge against inflation due to its inherent value and because its performance is not tied to stock markets.
In Malaysia, other safe bets include investing your money in ASB or Tabung Hajj—the value of your assets is likely to remain intact, and you can walk away with some dividends, albeit low.
Protect your investments by keeping cash on hand
In the short term, it’s safe to have some cash on hand, especially because you still need to pay off debts and bills, and your investments are low on liquidity.
The last thing you want is to have no access to money when the market has dipped. This extra cash shouldn’t be coming directly from your investment portfolio or your emergency fund.
The money used for your investment portfolio should be for long-term purposes.
Don’t stop investing, but take steps to protect your asset value
Never invest blindly, and always have some form of backup plan in mind, but particularly during a bear market, you must take necessary steps to protect your investments so you won’t incur as many losses when the market is bouncing back from losses.