Thursday, March 12, 2009

How to survive in the downturn?

In each downturn in the market the portfolio of each investor is tested and some passed the test with some degree of success while others fail. So what do those portfolio have in return and what step can you take to make sure that your portfolio resist the downturn. If you however failed to hold your portfolio together, the lessons learned in this recession will be for a lifetime.

Step 1. Diversification
Your portfolio should be well diversified with a balanced mix of all types of assets.The different types of assets will ensure that while some may decrease in value, the others may hold their value or even appreciate. In this recession some investments that were initially expensive will now become cheap and as a result you will be able to strengthen your portfolio by diversifying further.

You should have in your portfolio a considerable share of defensive counter-cyclical stocks, gold and precious metals, real estates and bonds. These will ensure that your portfolio do not lose value too much in case of a stock market crash.

In such a downturn, even the safest of investments can go bad. So diversification is even more important.

Step 2: Hedging
Hedging is even more important when you consider investing in a recession. I do not mean the type of hedging by hedge funds. I mean that every risk that an investment can have should be offset by another investment. For example if you buy a bond in a risky company that can go bankrupt, buy a treasury bill that can at least offset the loss.

Step 3. Keep cash
You should have a source of cash that you can use if the need arise. It may be because you have loss your job or that an investment on the cheap become available. In this recession where everybody is selling, assets are being sold very cheaply so if you have money you can buy them. Remember the Rothschild make their fortunes buying assets on the cheap. You can have cash readily available by having bond and cd ladders suitable set up so that cash is available on a regular basis.

Step 4. Time
Should your well balanced portfolio began to fall in value, then may be time is the best solution instead of a sale. remember that with time the stock market go up, and that after the recession a portfolio will regain its prerecession value quickly. So do not panic and start selling , just sit back and wait for the recession to pass.

Step 5. Sell when appropriate
Some investment may be going down and may not recover. So if you feel that a company will go bankrupt, its time to sell that stock or bond and at least recover some money. You can then use that money to buy other investments. Chances are if you buy another stock on the cheap and that stock recover your loss might be small.

Stock market and the economy do go down. The better prepared your portfolio is the better you can manage in this downturn. So sit tight and wait for the recovery. And keep that cash ready to swoop on that cheap house or stock.

Good luck guys.

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