We will all experience a downturn at some point in our lifetime.
The last one was in 2008 and in 2020 all signs point towards an impending recession. Downturns are scary, as many people’s livelihoods, investments and futures are critically affected. In a few hours, someone’s hard-earned savings can be wiped out. That’s why investors spend many hours and money looking for ways to protect their wealth and survive a recession.
Although your money will always be at risk no matter where you put it (yes, even under your mattress), there are some steps you can take to soften the blow of a stock market crash. The key is to do your research and educate yourself on the risk. Here are a few things you can do.
“Diversification” is the word you’ll hear on every seasoned investor’s lips. That’s because diversifying your portfolio is a good way to hedge losses when there is a stock market crash or downturn. By holding assets that work inversely to each other, your portfolio won’t be as volatile when the stock market tanks.
Examples of assets that may act differently to stocks would be:
By putting your money in several different assets, you are spreading the risk. If the stock market tanks, you can hold real estate, cash and gold to keep you going. If the real estate market takes a hit, you’ll have other assets to rely on. The more assets you have that respond differently to certain events, the less volatile your portfolio will be and the more it will grow over the years.
What assets are you invested in? If you’re not sure where to get started, look into different asset classes and see what would make sense to you depending on your circumstances. At Minted, we believe gold is a great way to diversify your assets.
Being in debt during a crisis can add a lot of stress and strain to your financial situation.
If you’ve got any high-interest debt such as a credit card or a car loan, consider paying off as much of it as possible so you feel more stable and secure when a recession approaches. Consider paying off a larger portion of your mortgage while things are good to help you reduce your monthly bills and feel a little safer.
A recession means tighter budgets and slimmer wallets, which means it may be more difficult to keep control of your debt together with your day to day expenses. A job loss or higher interest rates can make those kinds of situations a lot worse.
Take a look at your finances and analyse how much debt you’re paying every month. If you feel it’s a little higher than you’re comfortable with, consider paying some off now while you’re able to. You can do this by creating a budget and allocating a larger portion to your current debt – it’ll also help you identify any areas that you can cut down on to help you pay off that specific debt.
An emergency fund is essential for everyday life, not just for recessions. Having an emergency fund will give you peace of mind if things go wrong, and will help you stay afloat during a bear market.
Your emergency fund will most likely be in cash; this will help you reduce the volatility of your portfolio, keep your mind at ease and allow you to invest in opportunities that may arise. The last thing you want is to have to sell investments in order to cover expenses!
You’ll want your emergency fund to be somewhere that’s easy to transfer – so stock market investments or bonds are not ideal. If you have a large emergency fund, you may want to store your cash somewhere that does beat inflation over the medium to long term (yes, like gold).
Financial gurus usually recommend having at least 6 months of expenses saved up in cash in order to be prepared for any unexpected events. If your emergency fund currently fees very empty, consider directing any new contributions to a separate account and start saving. Where should you put that money? You can look into saving it into a cash ISA, however, if you want your money to beat inflation, gold will keep your money safe and give a decent return every year.
If you’re close to retirement, you may want to allocate more money to cash and other low-risk investments in order to reduce volatility as much as you can.
One thing is to talk about a stock market crash, and another thing is to experience it. Recessions are often longer and deeper than expected, so you’ll be incredibly grateful to have the appropriate systems in place when the stock market crashes. In the meantime, we believe gold should be a part of every investor’s portfolio due to its inherent value and ability to beat inflation.