As markets across all asset classes from equities, to commodities, to currencies face some of their steepest declines in decades, many people are scrambling to put together their crisis investment strategy. While it is ideal to be ready before a crisis strikes, it is never too late to put a plan in motion. The following steps will help guide you as you put a strategy in place.
1. Build Your Security Foundation First
Before you start investing, it's key that you have a strong foundation. That means paying off your debts and ensuring your financial security. Part of a solid financial foundation is having around six months of living expenses readily available in stable assets. Most keep it all in cash, but in a time of unprecedented money printing, it's wise to consider putting some of your funds in gold and bitcoin to ensure your foundation doesn't evaporate if inflation rises. (Full disclosure: Author holds investments in gold and bitcoin.)
2. Play The Long Game
Don't try to pick bottoms to go all in. Instead, assume that the bear market will last longer than you think. In the Great Recession, it took over 500 daysto go from peak to lowest low, and in the Great Depression more than 1,000 days. Chances are when you think the worst is over, there is more to come, and the moment you assume things will never get better, we will have finally bottomed. So what can you do? Split up your investment capital and deploy it over the course of a year rather than all at once.
3. Invest In What's Profitable
Recessions test all of us, including the biggest, seemingly unbreakable companies. If you want to make sure you don't invest into the next bankruptcy, focus on companies that make money. You'd be surprised how many companies have been operating at a loss for years. While this may work in boom times when credit is easy, it's these very companies that suffer the most in times of crisis.
4. Invest In What's Future-Proof
Let's be honest. Brick-and-mortar retailers were struggling long before the pandemic struck. The world is moving online, and it's more important than ever that you invest in businesses that are future-proof. If you cannot imagine a company will be here 10-20 years from now, it probably does not deserve your investment. However, if you see that the company is both profitable and you cannot imagine a future where it is not around, it may just deserve a spot on your investment short list. This year has made that evident as retailers are going bankrupt left and right.
5. Take Profits On Extended Relief Rallies
As mentioned earlier, recessions tend to last quite long, often more than 500 days. Part of this long down period are several bullish rallies where markets appreciate anywhere from 10%-30%. People often look at these phases as clear evidence that the worst is over and spend all their remaining capital on buying in. Not only are they buying in on an upswing, causing their average purchase price to be higher, but they also get rid of all their dry powder, making it impossible to buy future dips, which often results in panic selling once the next leg down comes around. Try to do the opposite of the crowd and take some profits when markets have already rallied a significant amount despite the fact that economic data looks bleak. This will free up capital to buy future drops.
6. Avoid Leverage
Whenever someone says, "I lost everything," it is almost always because they were over-leveraged. Whether that is because they traded stocks on margin, used options with close expiration dates or bought that property with little to no money down, nearly all financial ruin finds its roots in wanting too much all at once. If you invest with your capital, rather than borrowed capital, you can sit out the deepest and harshest drops. However, if worst comes to worst and markets drop an additional 50%, you will see countless people get margin called and lose every penny. Leverage is best used in controllable environments, which crises tend not to be.
Following these rules should help you avoid the greatest risk, which is the risk of ruin. Make sure to start with No. 1 to ensure you are taken care of before all else, and then proceed on to investing. As always, only invest what you are willing to lose, and always do your own research.