Weathering Economic Storms: 5 Tips for Disaster-Proofing Your Investment Portfolio
As much as we’d like to think we can time the market and keep our investments safe, that’s rarely the case. The stock market is continually moving through cycles, and we can’t always time our investments to perfection. As a result, many investors fear one downturn can be responsible for years of hard work being erased.
While you might not be able to control the market and its downturns, you can weather those economic storms. Sometimes, it’s as straightforward as taking some of the following actions:
Diversify Your Portfolio
As lucrative as the returns might be in stocks and other high-risk investments, diversification is the key to riding out recessions and steering slumps. Rather than putting all your money into singular categories like stocks, bonds, and cryptocurrency, allocate your funds into multiple investment vehicles.
Many investors choose real estate since there is always demand for residential and commercial properties for rent. Real estate is also a passive investment option that provides income through appreciation and rent. Best of all, it can hedge against inflation. When economies expand, real estate demand is typically higher. This can often translate into higher capital value.
Establish an Emergency Fund
Losing money in an economic downturn can be more than frustrating. It can also be worrying when you rely on your gains to pay your expenses. You might not be able to change the outcome of the downturn, but you can change your economic comfort during this time.
Set up an emergency fund separate from your investment funds with enough money to cover expenses for three to six months. Keep this money liquid so you can access it at any time. During this period, consider paying down your current debts as much as possible and holding off on incurring new ones.
Don’t Panic-Sell
When you see your stocks plummeting, it can be tempting to sell them off before they’re worth next to nothing. You might even find yourself watching your balance like a hawk and making emotionally charged decisions that aren’t necessarily in your best interests.
In such cases, it’s important to remember that stocks are a long-term investment. They will undoubtedly experience highs and lows. Always follow the ‘buy low, sell high’ strategy and ride out those economic downturns. It might only be a matter of time until they start to climb once more.
Talk to Financial Experts
Many people learn about investing as they go. They make mistakes along the way and don’t always get it right. However, learning how to disaster-proof your investment portfolio can sometimes require outside assistance since preparing for economic downturns is not always something you can ‘learn as you go.’
Meet with a financial expert to discuss your current investments and their soundness for riding out a recession wave. These professionals can provide helpful insights into how robust your portfolio is and any other investments you could make to keep losses to a minimum.
Explore Defensive Sector Funds
Defensive sector funds are mutual funds that invest in recession-proof sectors. Sectors like healthcare, groceries, and utilities tend to withstand recession conditions better than non-essential businesses like travel and entertainment.
However, these investment options are slow growers. As a result, diversification will still be necessary to ensure your portfolio is as balanced and healthy as possible.
Every investment has its own set of risks. However, some manage the challenges of economic uncertainty better than others. By disaster-proofing your portfolio today, you’ll be better positioned to keep your losses to a minimum. Of course, no article can serve as financial advice, so be sure to consult a reputable financial expert for advice tailored to your specific circumstances.