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Shift to saving, investing in a recession
With just about everyone tightening their belts, we are called upon to be creative in how we leverage our skills to have another income stream, how we budget and how we save. Here, we present avenues to turn a recession into an opportunity.
Make creative investing decisions
This could be as simply choosing to purchase fresh produce from the market versus buying in a grocery or by removing your credit card number from your online accounts. Another idea would be to avoid instant gratification, by waiting 30 days to decide on a purchase is also very helpful.
For those with stocks, you may be tempted to sell stocks as prices begin to fall but selling at the first sign of a recession is a bad idea. Stock markets tend to move several months ahead of the economy. So, by the time you know there is a recession, your assets likely would have already decreased considerably in value.
Additionally, trying to sell off and buy assets at just the right time can be a challenge for most individual investors. Also, not all stocks decline with a recession and you may sell the wrong ones.
Investors can also consider buying into mutual funds which usually hold a diversified portfolio of stocks specifically designed to grow through varied market conditions. Because of the depressed value of stocks, a recession is a good time to buy into a mutual fund.
Mutual funds and their large portfolio of securities provide investors with the key risk management strategy of diversification. Most investors cannot get the level of broad diversification in their portfolios that they can get from a mutual fund.
Make tough decisions
During an economic downturn, it is about making the right choices today and seeing the results tomorrow. Therefore, it is an opportunity to develop new habits such as tracking your expenses daily to determine those that should be eliminated.
Some of these tough decisions could include giving up your credit card or making a commitment to prepare breakfast and lunch at home versus daily purchases. On a more strategic level it could be the decision to develop a second source of income; from listing a spare bedroom for rental on Airbnb or developing a small business in an area that you have a passion for.
Determine your risk
Knowing when to invest money can be quite challenging especially if you’re dealing with a lump-sum of money, such as your back-pay. Investors may struggle with these decisions for years but we believe that the key to investing for the future is to “start investing now”.
Waiting for better prices or market conditions often leads to missed opportunities. In fact, we recommend taking advantage of low stock prices in a down market cycle to benefit from dollar-cost averaging, since you will be able to purchase more shares for the same amount of money in comparison to times when stock prices are high.
On building your savings, it is often hard to choose between saving more money for the future and using it for things you want to buy. The key here is to have a good sense of what are your needs versus your wants.
Do you need to eat out two or three times a week?
Can you save money by cooking at home?
How about streaming via an app instead of cable?
Most investors also find it difficult to determine how much risk to take. Too much can potentially wipe. On the other hand, too little and you can be left in the dust by the silent, cumulative forces of inflation. You need to determine your individual risk appetite, along with your investment time horizon and financial goals and objectives, to determine the investment vehicles that are right for you.
Save through budgeting
Budgeting is an essential and sometimes overlooked disciple, by documenting exactly where your money goes every month, you will have greater control over your spending decisions. You also need to determine and manage your debt levels.
Credit card interest is expensive and can make financing purchases very costly. When you use your credit card to buy an item that you don’t have sufficient cash for, it becomes even more expensive.
The average credit card will charge over 20 per cent interest per annum. Therefore, if you owe $5,000 over the course of one year you will pay $1,000 in interest which is almost $100 a month solely on interest.
Therefore, a good strategy for debt management is to pay off those balances which carry high interest rates and carefully manage expenses on big ticket items like vacations and weddings. Stick to borrowing only for acquiring assets such as a home or equipment for business to generate revenue.]
Stick to the fundamentals
No matter the economic environment, the fundamentals of investing do not change. Diversify your portfolio to include a mix of stocks: large and small, local and foreign along with bonds and short-term investments.
Understand your risk
Ask yourself: how well will I sleep if my investments drop in value? If a big dip is going to upset you, you need to put a higher proportion of your portfolio in bonds rather than stocks for example.
As an investor, you need to educate yourself and remain patient. Practice discipline. Recognise that periods of volatility are not at all uncommon over time.