It can be a scary and confusing time for investors when there is a downturn in the economic market.
There are several different strategies for protecting your investments in a volatile market. Many people refer to the economic downturn of 2008 when they think of an economic collapse. Savvy investors see this as a looming crisis that could reoccur within the next several years. In all reality, it is difficult to know when the market will have a downturn. Some of the most obvious tips for protecting your assets from an economic collapse include diversifying your investment portfolio and changing your investment habits as you get older.
The most effective way of protecting investments from an economic collapse is to diversify your portfolio. Many investors would say that those who are risk averse would be most likely to have a more widely diversified portfolio. That makes sense because you would be mitigating your risk across several different investments, thus, causing the risk to be more spread out and making it less likely to take a big hit if the market were to crash.
Hedging your risk
Some of the more traditional hedges for protecting a portfolio from economic downturns are bonds, cash, and gold. The most important hedge is time, however, because corporate earnings in stocks will bounce back quicker than reinvested interest or gold prices. It could depend on the type of risk that you are trying to avoid as well. According to an article in Investment News, in 2008 gold fared well when deflation and economic collapse were some of the biggest worries (John, 2017). Some other people would advise to buy long-term Treasury bonds to mitigate the risk. According to an article in the Wall Street Journal, public pension managers have shifted funds into “crisis-risk offset” strategies such as Treasury bonds because their price often increases while the markets are experiencing a downturn. They can be risky as well because they are only designed to offset a long turn economic downturn and not just a short period of market correction (Zuckerman, 2018).
Do not watch the financial markets daily
You can get a stop-loss order on stocks that are bought into, so they will automatically be sold if they go below a certain price. Just as with anything else, there are advantages and disadvantages to having a stop-loss order. It is good because you do not have to worry about your stocks losing any more value than what is set for it to automatically sell for (Mark P. Cussen, 2017). A disadvantage is that the price can dip below the set sell-off price and rise quickly afterwards, and the shares would be sold off and cause the investor to lose money that would not have to be lost if they had not gotten the stop-loss order (Joseph Hogue, 2018).
Change your investment habits as you get older
As you are younger it is said that you should be more risk tolerant and as you get older and near retirement be more risk averse. That is accurate because you have more time to recuperate the losses that may occur when you are younger.
John, W. (2017, August 30). Keeping client assets safe in an increasingly unsafe world. Retrieved from Investment News: https://www.investmentnews.com/article/20170830/FREE/170839998/keeping-client-assets-safe-in-an-increasingly-unsafe-world
Joseph Hogue, C. (2018, April 3). How to Protect your Money from a Stock Market Crash. Retrieved from My Stock Market Basics: https://mystockmarketbasics.com/protect-money-stock-market-crash/
Mark P. Cussen, C. (2017, December 19). How to Protect your Portfolio from a Market Crash. Retrieved from Investopedia: https://www.investopedia.com/articles/financial-advisors/100615/how-protect-your-portfolio-market-crash.asp
The Stop-Loss Order- Make Sure You Use It. (n.d.). Retrieved from Investopedia: https://www.investopedia.com/articles/stocks/09/use-stop-loss.asp
Zuckerman, G. (2018, October 14). October Rout Will Test Pensions' Wall Street Crash Protection. Retrieved from Markets: https://www.wsj.com/articles/october-rout-will-test-pensions-wall-street-crash-protection-1539525603