Are you worried if you should invest during a crisis? Then this article might be just what you need! In the following sections, we will give you some tips to bear in mind when investing during a market phase like this. Have fun reading!
Are We In a Recession?
Economic growth is, for the worldwide capitalistic system, an important metric. A recession is when a nation experiences negative gross domestic product (GDP) growth. Typically, in a recession, the stock markets decline.
How is a recession defined? Apart from the definition of negative GDP, every country has its own rules for when they call the situation a recession. For example, in Germany, the government states that the country is in recession when two subsequent quarters have a declining GDP. In Q4 2021, the GDP fell by 0.3%; however, in Q1 2022, it rose 0.2% – so there’s no official recession.
However, due to many economic struggles like high inflation rates and increasing energy costs, economic growth slowed in many European countries – and these effects can also be seen in the stock market.
Tips to Keep In Mind When Investing During a Crisis
When you’re in the middle of an economic crisis, where inflation is high and your investment in the stock market is in the red, it’s natural to question if an investment during these times is sensible. In the following section, we’ll give you 7 tips on things to keep in mind during this phase.
Stay calm and don’t panic
Many investors started investing in 2020 during the COVID-19 pandemic, where a good portion of people were at home and looked for alternative avenues to create income. Markets were soaring then and reached an all-time high in December 2021.
Now the market is down about 20%, and for numerous investors, this was the first time they have experienced a downward ride. Seeing your portfolio lose 10-20% in a matter of months can be challenging, no doubt about it!
If you invest in stocks, there is the saying that you only make a loss if you sell. So if you have the energy to ride out the waves of this downward trend, history has shown that it will most likely recover – if your portfolio is well-diversified.
Diversification is king
Diversification means that you invest in a variety of different assets. These can be stocks from various industries/countries, currencies, bonds, P2P loans, real estate, and so on. The idea is that by diversifying, you don’t put all your eggs in one basket but instead split them up, so you’re not as exposed to the volatility of a single stock or asset class.
Historically, broad diversification has helped to lessen the impact a crisis or “market crash” has on your portfolio because some asset classes negatively correlate with each other. During times of crisis, it’s an excellent time to re-evaluate your portfolio and perhaps do some rebalancing.
Take care of your emergency fund
Your emergency fund keeps you from taking up debt to pay for unexpected costs. This could be a broken washing machine that needs to be replaced, the car mechanic, or even money you need for everyday expenses because you lost your job.
If you feel uneasy about investing when markets are going down, it can be a wise choice to save money in a separate account and start/fill up your emergency fund. That way, you avoid depending on banks or other parties when an emergency arises, helping you avoid high-interest debt.
A bear market offers low entry prices
When prices are high and the sentiment in the market is good, people want to get in because they believe it will rise forever and don’t want to miss the train. It’s a classic example of “Fear of missing out”, or “FOMO”.
However, when markets fall, then there is fear in the market, and a sell-off happens. Experienced investors that have gone through many market cycles say this is the ideal point to get in because you can invest in stocks at a discount. So if you have a long-term approach, consider this when deciding whether to invest during a crisis.
Fixed Income Assets for stability
Investing in stocks or cryptocurrency brings volatility with it. If your money goes into growth stocks, you benefit from a rise in the stock price but also have to eat the losses when prices go down.
If you pick a fixed income asset, like bonds or an investment into P2P loans, you get a fixed rate of return, where money will flow into your account every month or year. This means you can’t make 100% in a year, but there is more stability in your portfolio. Finally, even when prices are in the red, these assets can still produce a solid income stream.
“Time in the market beats timing the market.”
As the old saying goes, “Time in the market beats timing the market”. It describes that if an investor goes with a long-term “Buy and Hold” strategy, where they buy the stock and hold it until they reach their goal, they’re more successful than someone that tries to buy at the bottom and sell at the top.
If you look at an equity price chart, it’s easy to tell where the tops and bottoms are historically – but it’s a different story when you’re in that situation and the market is still moving. Hitting the exact tops and bottoms is a challenging feat and has the risk of you never getting back in because you’re waiting for the perfect entry point.
Using a strategy like Dollar Cost Averaging, where you invest regularly and use the “Buy and Hold” long term, can be a much more beneficial approach.
Use history to guide your future
If you look at the stock market, housing market, or any other market over a long period, you will see that after downtrends, there are usually uptrends – and vice versa. So being aware that these market cycles are part of the game allows you to be much calmer and remain patient.
You know that eventually, the markets will rise again. If it takes six months, one year or four years – no one knows. But if history repeats itself, like it often does, your investment will one day be in the green again – assuming you stay in the market and don’t panic sell!
Bear markets offer ample opportunities for investors and those that intend to invest. But it takes some courage to stick to your initial plans when all markets are in the red. In these cases, you can use that time to fill up your emergency fund or diversify your portfolio by adding other asset classes.
One could be an investment in P2P loans that offer a fixed rate of return, instead of the fluctuating prices in the stock market. This brings stability into your portfolio, which can be much needed in volatile times.