Five Investment Tips for How to Make Money in a Bad Economy
Are you afraid to touch the markets? Worried every investment you make will fail?
Well, as long as you know where to invest, and do so correctly, you can actually make money during this difficult economic climate.
Below are five tips from a financial expert on how to make the most of your investments in a recession.
1. Financial markets remain volatile and treacherous. For the time being, we will see continued volatility in the financial markets. Therefore, investors should be proactive with a portfolio, continuing to make adjustments in terms of both selling and buying. Doing nothing does you no favors. The old adage is to use investments that lose less on the down movements while benefiting from most of the up movements. Be aware though, that there is seldom a free lunch with anything; losing less on the downside typically means giving up some of the upside. However, if, for example, with every up you get 70 percent of the up and with every down you participate in only 25 percent of the down, a number of these dips will put you ahead of someone who is participating in 100 percent of the ups and downs.
A real world use of this principle can be found in a long/short mutual fund such as TFSMX. This fund holds both long and short positions in stock. A long position is a typical stock purchase, where you buy a stock with the specific intent to sell it later and make a profit, assuming that, when the market rises, the position will increase in value. A short position is when you sell the stock first, believing it will go down in value, and then buy it back later at a lower price. Combining these options in your portfolio helps you make money even when the market is going down.
2. Reduce normal stock allocations by utilizing high yield bonds. High yield bonds are what is often referred to as "below investment grade bonds," meaning they are riskier than what is considered the more typical investment grade bond, but less risky than stocks. In my opinion, they currently have a better return potential than stocks over the foreseeable future, and are a worthy investment for right now.
3. Get new stocks as they emerge. Emerging market stocks currently have better return potential than stocks of developed markets. Increase your allocation to emerging market stocks by funding it out of a decrease in your typical allocation to domestic U.S. stocks.
4. Reallocate your portfolio. Allocating about five percent of your portfolio to commodities is usually quite effective in reducing the volatility (risk) of your portfolio without necessarily reducing the potential returns.
5. Capital preservation is vital. Good returns are less about "shooting the lights out" than preserving capital. A more successful contributor to long-term returns is consistently losing less when the markets go down, rather than gaining great amounts at once. For example, if the S&P 500 drops from 900 to 600, it has lost 1/3 of its value, but it will take a 50 percent return to get back from 600 to 900. Therefore, instead of seeking ultra high returns, focus on capital preservation. You'll arrive at your goal slower, but you're more likely to get there first.
It may be tempting to forgo any investments and try to forget that the stock market exists, but that is not necessarily the most responsible thing to do with your money. If you invest wisely, you can come out of this economic crisis in the black, and without a great deal of stress. Following these five tips is a good first start. Securing a trustworthy financial advisor to handle your returns should come next. And before you know it, the economy will have rebounded and you'll be better off than you ever were before.
For more advice on how to survive the troubling markets, visit [http://www.hopkinsim.com/resources/articles.html]
Well, as long as you know where to invest, and do so correctly, you can actually make money during this difficult economic climate.
Below are five tips from a financial expert on how to make the most of your investments in a recession.
1. Financial markets remain volatile and treacherous. For the time being, we will see continued volatility in the financial markets. Therefore, investors should be proactive with a portfolio, continuing to make adjustments in terms of both selling and buying. Doing nothing does you no favors. The old adage is to use investments that lose less on the down movements while benefiting from most of the up movements. Be aware though, that there is seldom a free lunch with anything; losing less on the downside typically means giving up some of the upside. However, if, for example, with every up you get 70 percent of the up and with every down you participate in only 25 percent of the down, a number of these dips will put you ahead of someone who is participating in 100 percent of the ups and downs.
A real world use of this principle can be found in a long/short mutual fund such as TFSMX. This fund holds both long and short positions in stock. A long position is a typical stock purchase, where you buy a stock with the specific intent to sell it later and make a profit, assuming that, when the market rises, the position will increase in value. A short position is when you sell the stock first, believing it will go down in value, and then buy it back later at a lower price. Combining these options in your portfolio helps you make money even when the market is going down.
2. Reduce normal stock allocations by utilizing high yield bonds. High yield bonds are what is often referred to as "below investment grade bonds," meaning they are riskier than what is considered the more typical investment grade bond, but less risky than stocks. In my opinion, they currently have a better return potential than stocks over the foreseeable future, and are a worthy investment for right now.
3. Get new stocks as they emerge. Emerging market stocks currently have better return potential than stocks of developed markets. Increase your allocation to emerging market stocks by funding it out of a decrease in your typical allocation to domestic U.S. stocks.
4. Reallocate your portfolio. Allocating about five percent of your portfolio to commodities is usually quite effective in reducing the volatility (risk) of your portfolio without necessarily reducing the potential returns.
5. Capital preservation is vital. Good returns are less about "shooting the lights out" than preserving capital. A more successful contributor to long-term returns is consistently losing less when the markets go down, rather than gaining great amounts at once. For example, if the S&P 500 drops from 900 to 600, it has lost 1/3 of its value, but it will take a 50 percent return to get back from 600 to 900. Therefore, instead of seeking ultra high returns, focus on capital preservation. You'll arrive at your goal slower, but you're more likely to get there first.
It may be tempting to forgo any investments and try to forget that the stock market exists, but that is not necessarily the most responsible thing to do with your money. If you invest wisely, you can come out of this economic crisis in the black, and without a great deal of stress. Following these five tips is a good first start. Securing a trustworthy financial advisor to handle your returns should come next. And before you know it, the economy will have rebounded and you'll be better off than you ever were before.
For more advice on how to survive the troubling markets, visit [http://www.hopkinsim.com/resources/articles.html]
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