It is perhaps the most feared phase of our economy’s traditional business cycle— the dreaded recession. A recession is defined as an extended period of significant decline in economic activity including negative gross domestic product (GDP) growth, faltering confidence on the part of consumers and businesses, falling real incomes as well as weakening employment, sales and production.
What can you do to make your investment strategy recession proof and financially secure? Remember that in a recessionary environment there is a hesitation and a slowdown of new investments. Additionally, investors will start pulling their money out because of fears that the markets will worsen. With that in mind here are a few suggestions to help you build a solid investment strategy that can withstand a recession and put your mind at ease.
Invest In Human Capital
We all lead busy lives. In the time you’re taking to read this blog post your inbox is filling up, your boss is calling and your stomach is reminding you that your forgot to eat lunch. Whether it is work, health or family related the to-do lists never end. Our day-to-day responsibilities make it difficult to set time, energy and money aside for yourself, but doing just that can have a positive impact on you as a person and more importantly, a positive impact on your wallet.
The skills, knowledge and other intangible assets you possesses can be used to create economic value for yourself, your community and your employer. They are precious assets and we have to budget, prioritize our time and allocate appropriate resources. Read a book on investing. Tune into your local news station. Take a financial literacy course. Read some more! Educating yourself will expand your knowledge and it may open your eyes to investment options you wouldn’t have otherwise known were available to you.
Don’t Be Afraid of Stocks
Although the stock market is never an exact science, the safest places to invest are in high-quality companies with proven business histories. A strong company with longevity is likely more capable to handle prolonged periods of weakness in the market if and when a recession strikes.
If you are looking to make a long term investment with stocks seek out companies with strong balance sheets. A company with little debt and strong cash flow is in a better position to recover and continue to fund its operations as it navigates through troubled economic times. In contrast, a company with greater amounts of debt may be too damaged to handle the costs associated with continuing operations in a weakened economic state.
More specifically, mutual funds are a lower risk investment to consider because money is spread across a number of different options and the success is not dependent on the performance of one single stock. In a mutual fund, it pools assets from a group of investors and entrusts a professional to make the investment decisions. These factors can take the anxiety out of investing during hard times and provide financial security. An added bonus is a more diverse portfolio which you may not get with individual stocks.
Keep an Eye on the Horizon
Instead of trying to predict the future and schedule investments around various market sectors, make investments while thinking about the big picture. It is always best to consider the effects of a recession at a macroeconomic level. Consumers slow down their spending, companies slow down business investment and the public’s perception of our economy often shifts from comfortable and optimistic to fearful and concern for the future. When economic times are tough you may become worried about prospective investment returns and re-evaluate the contents of your portfolios. More often than not the psychological factors of hard times manifest themselves in broad capital market trends so incorporate this into your decision-making process for any investments during a recession period.
By following these simple steps you can keep you investment strategy recession proof, as well as give yourself peace of mind.