According to the National Bureau of Economic Research, a recession is a"significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."
Therefore, a recession is simply a period of poor economic performance where returns on investment are low across all sectors. This means that efficiency of capital is low and risks are higher when investing.
So what implications does an economic recession have on your financial freedom goals? Should a recession bring your investment ambitions to a grinding halt? How should you approach investing during a recession?
Think of it this way. Even in periods of great economic performance, investing without accurate information and effective strategy always fails.
Therefore, the state of the larger macroeconomic environment is not the only factor that determines whether your investment becomes successful or not. Rather, there are other variables that must be
The same logic applies to periods of economic recession. There is absolutely no doubt that a recession adversely affects investing. However, using the right approach, you can still take steps to improve your financial life and get closer to your goals. The question is - how?
Successful investing is a game that requires strategy , a long term mindset and and a very calculative approach. However, economic recession usually triggers fear in investors and they make a string of knee-jerk reactions that harm them even more.
So in periods of recession, avoid panicking and do not make any rash decisions. Instead, take the time to analyze the economy, look at industries with opportunities for growth before quickly trying to de-risk your portfolio. Uninformed moves to "protect your capital" may undermine your future ROI prospects significantly.
Therefore, as the CIO of Crestwood Advisors John Ingram advises, investors should avoid "turning a temporary market loss into a permanent one" by selling "near stock market bottoms."
Diversification remains to be one of the most vital investment strategies for minimizing risk and growing investment— including in times of a recession. But how so when the economic slowdown during a recession is cut across most sectors?
Diversification helps to reduce over dependence on a singular investment / stock. As such, by creating a "basket" of investments (investing playlist), you can avoid making hefty losses when one investment plunges during a recession as other investments in your basket may maintain or even grow in value.
According to Jon Ekoniak of Bordeaux Wealth Advisors, you should strive "to build a portfolio that can weather the volatility by being well-diversified (including fixed income, equities, alternative investments, private equity, and real assets)."
It should be noted that starting to diversify your portfolio before a recession will be much more beneficial than doing so in the epicenter of a recession. Therefore, always aim to take advantage of investment playlists (which you can find on Alinea) to hedge against the economic downturns of a recession.
It is said that every rule in nature has an exception. That is why even in times of financial crisis, someone you know buys a new vehicle, moves to a better neighborhood, or makes their first million dollars.
The same happens in the world of investment. Companies with strong balance sheets are able to endure recessions better than those with poor cash flow. For instance, when a company has very low debt and more assets than liabilities, it performs fairly well in a recession.
Therefore, before selling during a recession, take the time to analyze the financials of a company. If its balance sheet is strong, then you can go ahead and invest.
Similarly, purpose to avoid entities with high debt or loss-making ones. This is because their access to credit as well as their capital efficiency is poor and hence they can be heavily affected by the economic headwinds that come with recessions.
In Economics, there is a concept called "autonomous consumption." Essentially, autonomous consumption refers to the amount that you spend even when your income is at zero e.g, on food, shelter, or health.
The whole logic behind the concept of autonomous consumption is there are needs which are so important that one has to satisfy them even when they have no disposable income to do so. The same applies to thinking about investing during a recession.
You should aim to invest in recession-resistant industries where consumer demand increases during periods of declining economic activity. For instance, consumers reduce spending on price inelastic goods that are non-essentials like luxury clothing, jewelry, or vehicles during recessions.
This frees up money to spend on goods like groceries, health products, and personal effects including cosmetics, and even alcohol. Therefore, you should always think of investing in such counter-cyclical industries in periods of economic recession.
Recessions are very volatile, high-risk cycles in the economy of a country. However, this does not mean that all investment activity has to come to a halt. By adopting the right mindset and strategy, you can take advantage of promising opportunities and get closer to your financial freedom goals even in periods of economic downturns.
Therefore, always look at recessionary cycles as potentially beneficial economic cycles that you can turn to your advantage through careful planning and recurring investing in the companies you support and believe in.
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