Stories about people losing their shirts during the last recession are prevalent. Most investors took major hits during the last round of tough times. Some lost their homes and most of their retirement account funds, and others couldn’t pay car finance loans and faced repossession. There are numerous riches to rags stories that come out of a recession. For some, it will take years to recoup those losses, and some may never fully recover from those hits. If the last recession has taught investors anything, it is that your investment portfolio will need to be restructured during tough times.
Bonds are generally considered to be among the safest investments during tough economic times. Investors should be aware that even these investments are not completely risk-free, but the risk is minimal. As with most investments, a lower risk equates to lower returns. The yield will vary depending on the amount of your investment and other such factors. While the return is lower than the average return on stocks over the last several decades, these investment options allow you the opportunity to see some growth on your investments with minimal risk.
You can consider investing in foreign stocks if a recession is localized. In many cases, because of the global nature of most business sectors today, a local recession often does have ripple effects that will spread to tremors in foreign stock markets. Further, you will want to do your research on foreign markets and perhaps consult with a financial adviser before investing. However, when funds are invested wisely, foreign stocks can provide you with greater growth during tough times than many CDs and bonds can provide to you.
Many investors will make the decision not to pull out of the domestic stock market entirely during rough economic times, and instead will opt to sell stocks in more volatile sectors and buy stocks in more stable sectors. As a rule of them, generally investing in companies that sell staple items are a safer investment option during these times. Consider investing in companies that sell things people will need to buy regardless of what the economy is like, such as toilet paper, staple foods, and other similar items. Healthcare and pharmaceutical stocks are typically a safer investment during recessionary times as well.
The Importance of Diversification and Timing
If you are considering options to make your investment portfolio safer before a recession hits, often your best solution is to diversify your portfolio. You may find it best to reallocate some funds to CDs and bonds, and to move other funds to safer stock picks. However, if the economy has already started its descent downward, you should carefully consider the risks of moving funds. When you sell stocks, you lock in a loss. Unless you will need access to those funds within the next year or two, it may be better to ride out a loss and wait for the price of those stocks to rebound. This is not always the case, and there are certainly stocks that never will rebound. This is part of the risk of holding money in the stock market, and this is why one of the reasons why diversifying your portfolio is so important.
Whether you are preparing for the next recession or are currently deep in the throes of one, you will find that these tips can help to safeguard and even grow your investments as much as possible during tough economic times.