Stock trading can be a daunting and complex experience, even under normal conditions. But when the market experiences a recession, things can get even more complicated and it’s tempting to take immediate action to protect your investments. But what actions should you take, if any?
With many economies around the world undergoing a recession due to the ongoing COVID-19 pandemic, experts agree that some action should be taken, though surprisingly, not drastic ones. Here are some things to keep in mind to make sure your stock investments safe during a recession:
1. Don’t impulse buy/sell
A recession is no reason to completely rewrite your investment pattern. If you trade via a stockbroker, veterans will tell you that your long-term stock investment outlooks already take possible recessions into consideration. This is why returns are always projected in the long term, and usually at small but steady upward rates (conversely, this is why you should always be wary of people promising large, short-term gains on investments; they’re often ill-advised or outright scammers).
Tempting as it may be to let go of a stock that’s devaluing in a recession, or to buy a cheap stock expecting it to skyrocket after the quarantine, chances are that rash decision-making is going to hurt your portfolio in the long run. If you feel movements are necessary to protect your investment if you feel that your particular stock may be hurt more than others in this type of recession, it may instead be better to….
2. Rebalance your investment portfolio
If you own stocks in one or several companies, chances are you’ve also invested in some bonds. To put things in context, stocks indicate your share of ownership in a company, while bonds are loans you give a company with the promise of repayment with interest over time, with no ownership involved.
Bonds, therefore, provide some small assured income over a predetermined schedule, while stocks only earn a profit when sold or if the company turns an overall profit over a time period and provides profit shares for stockholders, policies for which differ from company to company. Under relatively normal conditions, your investment in a company will likely be majority stocks and some bonds.
In a recession, however, you may wish to have trickle income while keeping the same overall stakes in a company. In which case, it may be advisable to flip your portfolio and trade stocks to get more bonds. That way, your overall investment stays the same, but you earn a little during the recession. And since bonds are effectively loans to a company, it may also help keep the company afloat during the recession. Though tempting as it is to take some sort of action – any action – in a recession, keep in mind that...
3. Recessions are temporary
A pandemic-induced recession, challenging as it may seem, is ultimately a short-term condition as far as financial markets are concerned. While you may, therefore, see a dip in your current investments, chances are, it’s no reason to let go of your stocks.
Sure, you may need to trade some to keep yourself liquid in the short-term, but don’t unload all your investments thinking it’s a way to bail yourself out from a sinking ship. If your financial adviser advised you well in the first place, you should already have backup cash or bonds set aside for a rainy day. This pandemic-induced recession IS that rainy day, so (sparingly!) spend that instead.
Once the pandemic ends, not only will your stock values return, they may even go up as stock trading is reinvigorated. Ultimately, the resilience of any company’s stock has less to do with extraneous factors and more to do with the fact that…
READ: Low-Risk Investments You Should Consider in a Time of Crisis
4. Strong leadership makes strong stocks
Both extraneous and internal factors affect the strength of a company, and by extension, its stock value. External factors, however, are outside the control of any company. It falls on its internal leadership to prepare for and overcome such factors, and the best companies prepare for those far in advance.
While recessions can make a company’s stock value dip, companies that plan for it keep it from dipping too much, or at the very least keep it from completely tanking and prepare to bring it back up when the time is right. Ultimately, preparations are what keep stock prices resilient, with sudden ups or downs being kept under control. Strong company leaders know that, ultimately, it’s not what’s happening right now that affects stock values. Instead…
5. Stock trading always looks to the future
If there’s something all previous points have made clear, it’s that stock markets are always based on expectations, not on present conditions. Sure, some companies may see their stock values drop during a pandemic-caused recession, so one may think of letting go before stock values drop too much. Or it may occur to you that perhaps buying now-cheap stock is a good idea as stock values will surely go back up after the pandemic. However, stocks values rise or fall way in advance of a perceived change. Therefore, with most companies, stock values already dipped before the lockdowns started.
So if you’re seeing a company’s stock value dipping just now, chances are, it was not caused by the pandemic, but something else entirely. Buying into suddenly cheap stocks during a recession may not be the best idea. Conversely, if you’re holding on to stocks that are falling just now instead of a more gradual dip months before the quarantine, that may be a red flag. For most stable companies with strong stocks, stock prices should start rising again soon as quarantines are lifted globally.
In the end, stock trading during a pandemic-induced recession may require a little more attention, but don’t get too overly aggressive or lax. Continue trading as you would under normal conditions, but never beyond what you normally would under more ideal circumstances. Buy too aggressively during a recession and you may end up with a lot of weak stock when the economy revitalizes. Selling too much may cause you to lose potential profits when prices go back up.
Stick with that strong, long-term investment plan you had before the recession, but allowing for some flexibility. If you didn’t have a plan, now’s a good time to make one by carefully studying your situation. Either way, trade within the risk tolerances you set for yourself when you started, and more likely than not, you won’t shy too far from your long-term targets.
READ: Best Life Insurance Plans With Investment Options