Knowing how to make smart investment decisions during tough times is a skill few investors have mastered. But while the circumstances may be slightly different, the underlying principles are fairly similar to the criteria you would normally use to guide your investment decisions.
Here are four guidelines to help you survive, and possibly even thrive, in a rough economy:
Decide Which Stocks to Cash Out Of
One of the biggest decisions you’ll need to make in a slow or stagnant market is which stocks to cash out of. Investors who’ve developed their skills in easier times have likely never had to examine this question for each item in their portfolio, but have certainly practiced this process on a smaller scale. Just as you would do with any other declining stock, examine the technicals and fundamentals, looking for any indication that a particular company / industry / sector is in economic freefall.
For stocks that show little promise in the short or medium term, there is no shame in going to cash for a period of time to keep your money safe until solid growth is again on the horizon. For investments in your portfolio that show indications of being able to ride out the storm, you may wish to stay invested, but you’ll want to carefully monitor their performance and reevaluate as necessary.
Find Opportunities in “Defensive” Sectors
While you may be pulling your money out of stocks in sectors that tend to rise and fall with the economy, you may want to re-invest that money in sectors and industries that aren’t as heavily dependent on a strong economy. Typically, this will mean looking for opportunities in Utilities and Consumer Staples, commonly called “defensive” sectors because of the role they tend play in your investment portfolio.
Finding good investment opportunities in these sectors is not a given. But if you find industries within these sectors with strong enough performance to merit investment, you’ll want to find the very best stocks in those companies to ensure the best return on your investment
Identify When the Market is Turning Around
There’s a lot of money to be made for investors who can spot when the economy has hit bottom and will soon be turning around. The idea is that the market cannot decline forever – at some point, it will begin to recover, and a period of growth will follow. The key, then, is to identify signs of a turnaround, and time your re-entry into the market for when stocks are at their cheapest, soon to be increasing in value.
By examining how the current market is doing, and comparing economic indicators with declines (and turnarounds) of decades past, you can do a good job of identifying the likely low point, and getting in when it is to your greatest advantage. Just remember, while few investors will perfectly spot the exact bottom, investing is like horseshoes – close counts! If you get back into the market near the bottom, you’ll still make out handsomely. Stock analysis software like HGS will help you spot the market trends more accurately, eliminating a lot of the guesswork.
Decide Where to Re-Enter the Market
When the market rebounds, some stocks will take off faster and experience stronger growth than others. So, making money on an economic turnaround isn’t just about timing – it’s about knowing which market leaders to invest in.
For most investors, this means conducting a top-down analysis, honing in on sectors and industries that will be gaining strength most swiftly, and then using stock tracking software to compare different companies within that group. By focusing on the right industries and selecting the strongest stocks within those industries, you’ll be poised to take full advantage of the stock market’s recovery.
Summary
Making it through a stock market decline requires patience and intelligence. Those who can do a good job of handling these four crucial tasks will put themselves in a much better position to control – and create – their own wealth.
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