Markets are impossible to predict with absolute certainty. No one knows exactly when the good times will turn sour and when a bull market will turn bearish. Therefore, finding the right investment strategy in a shaky market environment can help you navigate rough waters.
There are a number of approaches that are available for those investing in the markets. Here are a few that can help serve you and your long-term financial goals.
Be True to Yourself
The most important part of developing an investing strategy is to define what your ideal end results will look like. This holds true during both good times and bad.
In other words, your financial goals should remain consistent–and at least in theory–should not be impacted by the overall economic environment. If you want to save for a down payment on a house, put money aside for your children’s college education, or retire by the time you reach a certain age, these should be independent of how the market is performing.
In addition to your overall goals, you should also take some time to understand your relationship with risk. This extends beyond your capacity to absorb potential losses (though this is also highly important), and includes taking into account how a risky investment would make you feel.
Ask yourself how you would feel knowing that your portfolio could take a massive dive. Would this impact your mood and quality of life? Or would you be able to roll with the punches?
Understanding both your investing objectives and risk profile will help you design the right strategy for you. Shaky markets–when returns are threatened, and losses are a real possibility–make this even more vital.
Appreciate the Virtues of Diversification
The idea behind diversification is to spread both risk and reward among different asset classes, industries, and securities.
Putting all of your eggs in one basket, as we learned from the fables from our childhood, is never a good idea. Through diversification, we avoid the potential pitfalls of having our entire portfolio tank due to one or two mistimed, mistaken, or simply unlucky investments.
The benefits of diversification allow us to balance out opportunities to grow our portfolio. Popular investment strategies such as the 60-40 portfolio approach are built around this concept, as this framework will lead to a portfolio consisting of 60% equities and 40% debt. In a bear market, bonds are generally a safe place to park your money, protecting you from experiencing losses across the board.
Similarly, investing in mutual funds is an effortless way to create a diversified portfolio, as by definition these consist of multiple assets packaged in a single security.
Regardless of your objectives and risk preferences, diversification should be a staple of your investment approach. This is especially the case when markets are shaky.
Consider Dollar-Cost Averaging
Via dollar-cost averaging, investors will place the same amount of money into their investments at regular intervals. By investing the same amount of money at consistent timeframes, you are insulating yourself from buying into the market at inopportune times.
When the market is going up, your dollars will be purchasing less. When the market is sinking, the same amount of money will go further. Experimenting with different securities and investment amounts on the TipRanks’ Dollar-Cost Averaging Calculator can illustrate how this works in practice.
Using the dollar-cost-averaging methodology can help you weather shaky markets. It allows you to be less concerned about the short-term repercussions of market volatility, as in large part you have taken the timing of your investments out of the equation.
Dollar-cost averaging also has the additional benefit of ensuring that you are allocating regular contributions to your savings and investment goals as part of your budget. Putting money away for the future is always a valuable and worthwhile strategy.
Find Industries That Are Recession-Proof
While no industry is completely shielded from downward-trending markets, there are certain sectors that will be fairly insulated during a recession. If a shaky market appears on the horizon, putting your money in these investments can help protect your wealth.
When individuals are faced with a slowing economy, consumption drops and discretionary spending falls. The necessities, however, will continue to be purchased. Consider investing in some of these industries when markets look gloomy:
- Food and nutrition: Consumers will always need to buy food and other nutritional items. Grocery stores and food manufacturers are generally safe investments that are sheltered from economic downturns.
- Pharmaceuticals: Most people will choose to place a priority on their health and upkeep, meaning that demand for products related to dental hygiene, medicines, and other healthcare-related expenditures should not be materially impacted by a downturn.
- Utilities: Individuals and families will always need electricity to power their homes.
- Discount retailers: While fancy purchases will drop during times of scarcity, retailers selling discount clothes can experience growing demand as consumers are looking to cut down on costs and save when possible.
Finding sectors, industries, and companies that sell products that people will always need–regardless of the market environment–tends to be a good strategy during shaky times.
Conclusion: Finding the Right Path for You
Finding an investment strategy that works in times of trouble can help investors navigate bear markets and the uncertainty surrounding them.
These strategies outlined above can help both aggressive and conservative investors weather periods of uncertainty. Continuing to invest through regular allocations of capital, potentially with a focus on more recession-proof industries, can serve you well. However, how you decide to allocate your portfolio is dependent on your individual preferences.
Aggressive investors prefer to take on more risk by definition. This is also holds true during downturns, when they might be more willing to risk purchasing equities in the hopes of acquiring undervalued companies whose stock prices have dropped. By increasing their exposure to the stock market during these periods of shakiness, aggressive investors are hoping to follow the timeless investor credo of buying low and selling high.
On the other hand, a more conservative investor would likely be more keen to shield themselves from volatility. Their predilection to venture towards safer options would grow, as would their desire to increase their diversification among different asset classes.
Still, the best strategies are the ones that you remain consistent with, allowing your wealth to accumulate throughout the years through the magic of compound interest. This will help you to achieve your financial objectives, which is really the ultimate purpose of whatever investment strategy you elect to pursue.
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