How to Prepare for the Next Global Recession
Whether you want to hear this or not, there are significant signs of a potential global recession. Many central banks are quickly shifting their tone and backtracking. It was only last year that central banks were raising interest rates; they were on a path of monetary tightening. They have since paused or reversed their tone.
The Federal Reserve was hiking rates from December 2016 at 0.50-0.75% up until December 2018 at 2.25-2.50%. They have recently been forced to completely half these hikes now for the foreseeable future, given the concerns around global economic health. Its peers Bank of England, Bank of Canada and European Central Bank were also tightening policy (raising rates), but have since taken a back seat on this approach.
Several underlying risks are forcing central banks and markets to pare back expectations for global growth. These include trade wars, Brexit, general financial instability and significant economic slowdowns in the powerhouse economies of China and Germany. It is safe to say that the global economy is treading on very fine lines at present. There indeed isn’t a shortage of things to be worried about. Against this backdrop, let’s look at ways in which to prepare and protect our portfolios.
Diversification is a portfolio management strategy which supplements a variety of investments within a single portfolio. The goal behind diversifying is that several of the investments will yield a higher return. Also, you are likely to face lower risk by investing in different vehicles, rather than exposing yourself to one area.
Investing in stocks can yield high returns with the right companies. You should look at firms you know and trust, but also do not put all of your money into one stock or sector. Look at spreading your risk (i.e., diversification). The beauty of stock ownership is that you can make money in two ways. Most investors will have the intentions to buy low and then sell high. They tend to look at fast-growing companies that appreciate. This is very attractive to both day traders and buy-and-hold investors. Investors also put their money into stocks to reap in the quarterly dividend payments.
You could explore investing in the precious metal, gold, which is historically a good hedge against a market crash. When Britain voted to leave the European Union, the price of rallied immediately. A massive downfall of investing in gold is that buying and holding the physical commodity can be expensive to store. However, it is not the only way you can access the precious metal. As an example, a physically-backed gold exchange-traded fund (ETF) also provides exposure to bullion.
Bonds can also be another attractive addition to your portfolio, which is known as a fixed income haven asset. They are designed for safety and income; typically they are not as volatile as stocks may be. In terms of returns, they are not as rewarding as most stocks, as historically stocks have outperformed bonds along with gold and cash over the long-term. However, over the short-term, bonds can be a healthy way of reducing your exposure to the enormous losses of a stock market crash, which can be somewhat painful in the short-term.
Listed Real Estate Investment Trusts (REITs) can help you diversify your portfolio because, like real estate, they are a distinct asset class which historically has been able to demonstrate low-to-moderate correlation versus other market sectors of the stock market, in addition to bonds and other assets. In other words, REIT returns can at periods provide the outperformance needed in further smoothing your diversified portfolio.
Cryptocurrencies could be another very worthwhile investment adding to your portfolio for that additional diversification. The cryptocurrency market has presented itself as an excellent opportunity for new investors coming into space. The entire market has been falling since January 2018, pulling back considerably and reversing most of the gains made in the prior year. Young investors now would be somewhat ‘buying low’ in comparison to the heights many of these cryptocurrencies have been.
However, it is incredibly volatile which is what makes it such a profitable investment. Placing your money in the wrong coins at the wrong time will see you making substantial losses. Similarly to stocks, invest in coins that you trust and believe in. Conduct due diligence on their purpose, value propositions, and use cases. If you are adding cryptocurrencies to your portfolio, again look at diversification as you would in the stock market. At present there are no ‘safe’ bets, however, perhaps take a favor over some of the larger capped tokens.
Remember that diversification is a strategy that combines a wide variety of investments within your portfolio. These holdings can be diversified across asset classes and even within classes, as well as geographically by investing in both domestic and foreign markets. Diversification has proven to limit portfolio risk but can also mitigate performance, at least in the short term. It is appropriate for the risk-averse and works well for prudent investors. It can help protect your capital from the wild swings of the market while achieving long-term growth at the same time.
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