For at least the last six months, analysts everywhere had been predicting that a recession was on the way. Those predictions have now come true in dramatic fashion, with the coronavirus (COVID-19) bringing global economies to a halt. The only real question that remains right now is how bad things are going to get.
The answer is that nobody really knows. With every economic indicator simultaneously flashing red, it’s become impossible to sort between short-term problems and long-term structural economic deficiencies. For the average investor, though, there’s been a single bright spot amidst the chaos. That bright spot is the fact that the US stock market hasn’t cratered as hard as expected.
After an initial plunge, both the Dow Jones Industrial Average (DJIA) and the Nasdaq have recovered to within striking distance of pre-crisis levels. That’s giving casual investors some breathing room to reassess their long-term strategies, free from some of the fear of massive losses. For those undertaking that process now, here are three things to keep in mind.
1. Rebalance Carefully
The first major effect that the coronavirus-induced recession has wrought is that it threw almost every investor’s portfolio into an imbalanced state. Now that some of the initial shock has worn off, it’s a good time to rebalance assets to get back in line with your risk-management strategy. It’s important, though, to make sure that your efforts to do so try to follow two simple rules:
Use new money where possible Proceed in stages
Right now, it’s not a good idea to rebalance a portfolio through asset sales unless you lack the liquidity to do it any other way. That’s because there’s no way to know when and what to sell. It’s a better idea to use new investment (like retirement account contributions) to rebalance your portfolio. That will prevent you from locking in losses that you’d otherwise be able to avoid. That strategy dovetails with the concept of rebalancing in stages because it allows you to observe the market as you make changes. If conditions improve, you’ll have less to do. If they don’t, you’ll have more information to base your risk management strategy on.
2. Lean into a Defensive Strategy
The trouble with the current market situation (besides the obvious economic angst), is the unprecedented nature of what’s happening. The last time a major pandemic on this scale hit the US, the market only knew one direction: down – with the selloff stretching a full eight months. This time, we’re already seeing a market that’s somewhat unmoored from the reality of the situation, spurred on by speculation of a massive government intervention to stabilize the markets further. That means we’re in uncharted territory here, and it’s anybody’s guess as to what’s coming next. For that reason, the average investor should err on the side of caution and make some defensive position adjustments to their holdings. For example, going heavy into blue-chip stocks, T-notes, and commercial paper may be a good idea.
3. Consider Alternate Asset Classes
Another thing investors might consider adding to their long-term investment strategies is some additional asset classes beyond stocks and bonds. The most common one most investors turn to in times of economic trouble is gold and other precious metals, but it’s not the only option. Smart investors may also consider newer asset classes like cryptocurrencies, which seem to be holding out against the economic headwinds even better than the stock market. They may also want to consider currency investing, as it offers a unique way to profit in a potential downturn. Forex brokers tend to do decent business in recessions, and there’s a good reason for it – it’s a high-liquidity investment type that can yield significant returns when used appropriately.
The Bottom Line
Given the overall uncertainty of today’s economic climate, the best advice investors can heed while reassessing their strategy is perhaps the simple admonition of “don’t panic”. More than anything else, it’s critical right now to come up with a workable plan and then execute it while keeping a steady hand and a calm demeanor. Making reactionary decisions based on rapidly-changing events is a sure loser even in the best of times. Right now, it could result in a financial disaster. Those that take a measured approach and stick to it will be the winners in the long run. And if you’re careful and make smart choices now, you can be one of them.