Tags: recession | investment | gold | treasuries | real estate | cash

How Should You Adjust Your Investing Strategy During a Down Economy?

How Should You Adjust Your Investing Strategy During a Down Economy?
(Dreamstime)

By    |   Wednesday, 10 January 2024 09:17 AM EST

When you turn on the news lately, most commentators will claim either that our economy is doing terrible and we should run to the hills or that our economy is secretly doing awesome and only crazy conspiracy theorists are worried. (Spoiler alert—neither side is getting it right.) This conflicting information from supposed experts understandably has the average American confused about what to do with their investments.

Investing strategies that work well during a great economy typically perform poorly during a bad economy. In contrast, the strategies that work well during a bad economy will usually result in missing out on a lot of potential growth during a good economy. That’s because an asset’s performance is based on certain economic factors, so each asset type performs differently in different situations.

In other words, the factors that make a particular asset strong in a bad economy are the same factors that make it weak in a strong economy.

Let’s have a quick dose of reality here — the economy is fundamentally being propped up on life support by debt and deficit spending, and it will be this way for the foreseeable future. Our government and elected representatives have dug a hole that only significant structural change can fix. We’re talking about a timeline measured in years.

But that doesn’t mean that America is collapsing or you should stop investing. You absolutely should NOT stop investing because sitting on the sidelines means your money will be eroded by your arch nemesis and mine — inflation.

Instead, you’ll want to adjust your investing strategy to focus on assets that will perform better in a down economy so you can protect your hard-earned money from the ravages of an irresponsible government.

Invest in assets that act as a hedge against inflation

Certain asset types, like stocks or speculative real estate, tend to lose value when the economy slows and inflation climbs. In contrast, other asset types, like precious metals, Treasury bills, and stable income-producing real estate, tend to maintain, if not increase in value.

It’s important to point out that while these assets typically perform better during inflationary periods, don’t expect to reap massive profits. The primary intent here is to reduce or eliminate loss due to inflation rather than maximize profit. Remember, risk and reward are inversely correlated when it comes to investing, so generally speaking, the lower the risk, the lower the profit you can expect to achieve.

That’s not bad because it gives you some guardrails to work within. When the economy is doing great, you can afford to take more risk because it’s more likely to pay off. Still, when the economy is embroiled in brutal inflation and the risk of a deep recession like we’re facing today, you’re far better off making the safe play by shifting investments into asset types that act as a hedge against inflation. That helps to protect your hard-earned money and positions you in a strong buying position when the economy turns around.

Be on the lookout for opportunities

While the economy is objectively unstable, uncertain, and declining, that doesn’t mean there aren’t some fantastic investing opportunities. There are likely more now because market volatility creates new opportunities for well-positioned people who know where to look.

You might be thinking, “David, that doesn’t make any sense. Where can I find these opportunities if everyone is hurting financially?”

The truth is, they’re all around you. You just have to look in the right places, which more often means, knowing the right people. Investment and business opportunities, more specifically, “main street,” or tangible asset investments, are best curated by connections — who you know. I often say, “Your network is your net worth.”

Here’s an example of an opportunity. Let’s say someone owns a property that would be a perfect investment for you, and their business revenue starts to decline so they need to sell that property to cover their expenses. But because the market is down, they can’t command the same price they could have the prior year. This creates a significant opportunity for you while solving a problem for them. Win/win.

The key to finding opportunities like this is clearly defining your buy box — a set of criteria outlining precisely what you will or won’t invest in, and monitoring the people and companies with the assets you want to acquire.

This might include setting up Google News Alerts, subscribing to their newsletters, and following them on social media, among other methods to keep tabs on their financial health. Maintain your network connections. Suppose you see signs they are facing financial difficulties or pivoting to a new direction. That may indicate that one or more of their assets may soon be (or become) available to purchase, and often, at a discount.

Avoid risky or speculative investments

There is a time and place for those homerun investing opportunities that can change the trajectory of your financial life, but it’s not now. I mentioned earlier how risk and reward are inversely correlated, but I need to add some nuance here — during periods of high inflation, risk will increase dramatically, while potential reward (growth or high appreciation) will typically be stagnant.

It may be tempting to swing for the fences when the masses are still in a euphoric state of the faux economy, especially when your friends and colleagues are talking about the killing they’ve recently made in x,y,z. It’s more critical today to evaluate every investing opportunity with greater scrutiny than usual because of the increased risk caused by today’s turbulent economic environment.

The adage applies here—if it seems too good to be true, it probably is.

Build an emergency fund and stay liquid

Most financial experts advise building an emergency fund to cover your living expenses in the event of a loss of income or price increases. Six to nine months is usually enough for most people, but I recommend that entrepreneurs set aside more because we must maintain our businesses through these slow periods.

Beyond that, you also need somewhere safe to put your current investment capital.

While having some actual cash reserves — money sitting in demand or checking accounts at banks — is always necessary, other “cash equivalents” can be a safe store of liquidity and still provide a reasonable return on investment. Besides having liquid capital, which offers a margin of safety for personal and business needs, cash on hand is also the asset that provides the means to make opportunistic investments when others cannot.

Aside from your emergency fund, everything should be held in a highly liquid asset. You might start with a money market account, which offers a 4%-5% return with today's rates — significantly higher than the paltry 0.57% national average for savings accounts.

Treasury bills are another solid option because they’re stable, backed by the US government, and relatively easy to liquidate. Plus, when you leverage a laddering concept, you can reduce or eliminate potential losses by redeeming them early. Essentially, this is a matter of purchasing T bills with different maturity dates to create a stream of available cash without facing penalties. You can use that cash or reinvest it into new Treasury bills, depending on the situation. Laddering can also be used with bonds and CDs.

Getting Back to Normal

No one can say how long an economy may remain in a recession.  Typically, the range is anywhere from six to eighteen months. Remaining calm and not taking the position that “the sky is falling” will provide you with opportunities many will not be able to access. 

Economic cycles have been a part of our society for over a hundred years and will continue, probably more frequently than in the past.  It’s like a forest fire that nature requires from time to time to clean out all of the underbrush so that the trees can continue to grow and flourish. Recognizing this as a fact and preparing in advance will soften the blows and may provide you the perseverance needed to survive and thrive.

_______________
Dr. David Phelps created Freedom Founders to help its members achieve the freedom they wanted in their lives by building the necessary financial foundation. He is a noted financial expert who is regularly cited by the media, and recently helped the FL Dept. of Education develop its new financial literacy curriculum.

© 2024 Newsmax Finance. All rights reserved.


StreetTalk
When you turn on the news lately, most commentators will claim either that our economy is doing terrible and we should run to the hills or that our economy is secretly doing awesome and only crazy conspiracy theorists are worried.
recession, investment, gold, treasuries, real estate, cash
1383
2024-17-10
Wednesday, 10 January 2024 09:17 AM
Newsmax Media, Inc.

Sign up for Newsmax’s Daily Newsletter

Receive breaking news and original analysis - sent right to your inbox.

(Optional for Local News)
Privacy: We never share your email address.
Join the Newsmax Community
Read and Post Comments
Please review Community Guidelines before posting a comment.
 
Get Newsmax Text Alerts
TOP

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved
NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved