Even the most optimistic investors will admit that the economy will not get that ‘U’ shaped recovery that everyone was hoping for at this time in 2020. The loss of life, money and resources, especially in already marginalized communities, has been staggering. In times like these, health (both physical and mental) takes top priority, and perhaps this was reflected in your budget (or lack of one) last year. However, if you want to recommit to your long-term financial goals or learn how to grow your assets at a time when the stock market is slowly recovering, keep reading below:
- Don’t panic
Douglas Adams had it right — don’t panic. When the economy is struggling, it’s important to stick to your goals and keep investing according to your budget and goals. Remember, you don’t actually lose your money unless you sell your investments at a loss. Your best bet is to keep your money where it is while the market recovers. You should only be investing money that you can afford to lose and are willing to leave alone for several years, depending on your investment strategy.
Historically, the stock market averaged returns of 10% per year, but returns in any year are far from average. You have to keep your investments in the stock market over a long period of time, despite slowdowns and recessions, in order to get returns on your investments. This is why experts generally recommend that you stay invested when the economy slows to stay on track with your financial goals.
In fact, if the economy is recovering, chances are that prices will go up in the short term. This means that it’s actually a great time to buy stocks since they’re currently ‘discounted’, which gives you time to get in on the growth. If you can afford to invest, seek out ETFs and other funds that expose you to the market (or you can pick specific ETFs based on industry sector, investment strategy, etc.) in order to give yourself the best chance of success.
- Layer on industry-specific allocations
When it comes to investment decisions, it can also be a good idea to realign your portfolio to the economic growth cycle. Fidelity has a handy chart (referenced below) for how specific industry sectors perform during phases of the business cycle. While you shouldn’t significantly change your portfolio allocations every time there is a shift in the economy, this framework provides additional complementary strategies for financial portfolios.
Of course, bear in mind that analyses like the one above are based on historical patterns and studies, and don’t have to correlate to future returns.
- Explore overseas
There is a whole investment universe outside the US stock market, but it was mostly closed off to individual retail investors until very recently. Now however, investors can look abroad to countries with differing fiscal positions to the United States. For example, an investor focused on higher GDP growth rates than the 2% average in the US, can look to emerging markets like India, Taiwan and China. Emerging markets make growth and innovation a focus, along with increased stability for investments. To invest in the stock markets of these emerging markets, look for international or emerging markets ETFs from well-known investment platforms. Vanguard, for example, offers VWO and VEE in its portfolio.
- Get local
On the flip side, an expansionary economy is also a great time to inject cash and capital into your local community. By doing so, you can earn investment returns while addressing the unique needs and challenges of your community.
There are multiple ways of investing in your local community. Here are some options to look into:
- Invest directly in community development loan funds or pools.
- Invest in socially responsible mutual funds with a community investment focus.
- Invest directly in municipal bonds in underserved communities to help fund infrastructure, educational facilities, and public goods and services.
- Look for community campaigns on Indiegogo and Kickstarter
- Think outside the box
Your diversification strategy should include alternative assets, such as commodities, currencies, and real estate. A lot of these assets were only available to accredited investors or organizations in the past, but there are many avenues for interested investors now.
Real Estate Investment Trusts (REITs) are a great way to protect your money while making consistent returns. Though they may require more cash upfront (most platforms have a $500 minimum), they provide diversification to any portfolio. They can also be a great source of supplemental income that can offset lower returns on investments in other industries during an economic slowdown. DiversyFund’s Growth REIT, for example, targets a return rate of 10-20% for its properties.
Although the economy is in an expansionary cycle, the reality of the situation is that it could take months, even years, until we see a booming economy again. Recovery is often not as dramatic or sudden as the recession itself:
This can make many investors jumpy enough to lose sight of their financial goals and abandon their investment approach. It’s important not to try to predict, or base decisions on, the timing of an economic recovery. There are, however, many opportunities that present themselves as an economy recovers, spanning a range of global, hyper-local, or alternative investment strategies. It’s important to be flexible enough to invest in these opportunities during periods of expansionary growth, while still taking steps to preserve your portfolio and protecting your assets.