Considering the repercussions that the novel coronavirus has brought with it in every sector of the society, the world economy is inevitably awaiting a recession. Even though we have, to date, come past the market downturns successfully, nobody knows how the next will turn out to be and what can be done to normalize things. However, when the market is not in a position to assure you to return for your long-term investments, you should be patient and accept that the short-term fluctuations are indispensable.
For the uninitiated, downturns in the stock market occur when investors are scared out of their shells and, consequently, make mistakes, which, in turn, impact their future wealth. Before moving on with anything else, analyze your level of risk tolerance to delineate your target asset allocation. If there’s still a decent amount of time before retirement, investing in a higher portion of stocks would be wise. Similarly, if you want your money to fetch returns near-term or medium-term yet, expect lesser vulnerabilities, a higher percentage of investment bonds can strengthen your portfolio.
Nevertheless, with stock markets, you can hardly predict anything. Even if you put in the best of your efforts to streamline asset allocation with your investment goals and risk tolerance, a slight tick off can make all your hard-earned money go down the drain. To save you the trouble, in the following section, we will be jotting down ways to prepare your portfolio for a bear market.
Be sure about your goals.
More than anything else, you should be sure about the chief reasons that led you to invest in the first place. Whether you wanted to secure your family’s life after retirement, fund your children’s education, move to a new city, or the like, there must have been a reliable cause driving this decision. Reassess your goals no matter how vague they look from this point in time.
When you understand the aims that your investment is meant to fulfill, you will automatically become comfortable with your portfolio allocation. As long as your plans are to safeguard your future, short-time crisis here and there can be easily dealt with.
Differentiate your investments
As an alternative to investing in one single domain, spread out your resources amongst multiple stocks, including tech, industries, utilities, healthcare, and such others. This accomplishes two functions a) reduces the risks of running a loss b) can open doors to unexpectedly high returns.
Use free tools to link all your investment accounts to get an insight into the present-day status of asset allocation and the collection of your portfolio. Low-cost index funds can be taken into consideration, too, as they will diversify your investments across the stock market and curtail the spotlight shed on any one industry.
Sway towards fixed-income
If there are still some risks looming large on your investment, try swaying towards higher-risk stocks or lower-risk bonds. Remember that there are multiple forms of bonds available in the market, and they are all accompanied by distinct components of risk. One such risk is known as default risk, where the bond insurer refuses to make interest payments or defaults after the principal is repaid.
Also, companies that do not have decent credit scores against their names can have high debt levels, financial distress, or issue high-yield bonds. When facing a market downturn, holding on to these bonds might not diminish your risk of exposure altogether. Instead, US-treasury bonds and investment-grade bonds are less perilous, thereby constituting a formidable choice of diversifying risks.