Here’s How To Invest During an Economic Downturn
The stock market can be unpredictable to say the least. For this reason, periods of slower economic growth aren’t really a huge surprise. What should you do with your money during an economic downturn?
The first step in deciding your next move is knowing what you want to accomplish. Are you trying to benefit financially by taking advantage of falling stock prices, or do you simply want to protect your nest egg? The stocks you choose depend on whether you want short-term profits or long-term successes.
I don’t usually recommend trying to “buy the dip” because I like to focus on long-term benefits. However, some people have had success buying low and selling high. This technique involves scooping up stocks during a downturn with the intention of either reselling or holding onto them for the future.
There is a high amount of risk involved, so you’ll want to be extra cautious if you go this route. The only time I can see a benefit personally is to take advantage of the lower stock prices of recessions to invest in well-known, normally profitable businesses for less than usual.
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If you’re looking to minimize losses in your portfolio, here are a few rules of thumb that can help:
Invest in businesses that are managed well: Good management means businesses are likely to manage periods of slower growth successfully.
Look for strong cash flow: When balance sheets show a history of solid performance and wise reinvestment in operations, it means the company has assets to draw on to help it through tough times.
Avoid speculative investments: Unless you’re a longtime Wall Street pro with extra money to burn on highly risky investments, don’t play the speculative lottery.
Be careful with companies that have high debt: Businesses that rely heavily on borrowed capital to make ends meet every month have the highest risk of going under during downturns. Don’t trust the brand name, either. Look at the balance sheets.
Steer clear of cyclical stocks: Airlines, hotels, car manufacturers, furniture businesses and luxury brands are examples of cyclical stocks. They perform well during economic booms when Americans have plenty of money to spend, but they always shrink during downturns.
The reason I say to be careful with any company that has a lot of debt is because even major corporations, such as General Electric, have fallen during recessions.
Some corporations make it seem like everything is fine by borrowing even more money when interest rates are low. However, while debt-ridden businesses may seem alive and kicking, they’re slowly drowning financially. On the other hand, businesses that go into a downturn with healthy cash flow have far more options for repaying any debts.
Another option is to choose downturn-resistant investments. These are companies that aren’t normally affected by recessions. Their products are always in demand. Grocery stores, healthcare companies and other consumer staples industries are usually safe investments because people will always need to buy groceries or go to the doctor.
As you can imagine, there’s a lot more risk involved when trying to profit financially from an economic downtown. Trying to insulate your finances from market volatility is a safer financial strategy. In fact, if you have a sufficiently diversified portfolio, you may not need to do anything at all to weather a slow economy.