The economy and the investment markets behave like roller coasters sometimes. So what do we do in the face of such changes? Whether you are an investor, entrepreneur or employee, you’ll benefit from being prepared when changes strike. Here are some things I do to prepare myself for economic uncertainty.
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1. Think ahead and try to think positively.
Your financial situation won’t hurt so much if you begin focusing on your end goals. I console myself by thinking that when economic shifts happen, the stock market usually reacts to such changes in advance. So if we expect the next year to be rosier for the economy, then watch out for a stock market recovery some 6 months earlier (or thereabouts).
2. Study the investment markets.
I’ve taken a renewed interest in understanding how the investment markets work; it’s been said that down periods are rife with prime opportunities. I try to look at what things we can leverage today so we can be better positioned when things start to get better. I’ve also been studying stock technical analysis more, using these free stock charting tools from INO.com, Morningstar and Yahoo Finance to keep me abreast of market movements.
3. Review our investment portfolio, and do some rebalancing.
On those occasions when the markets are in free fall, it hurts to see sinking numbers. This is why I check my investment portfolio on a regular basis to ensure that it doesn’t stray too far away from our original asset allocation model. I’ve been working to readjust our investments so that our cash position doesn’t overwhelm our shrinking stock allocation.
4. Consider new ways to invest.
I’ve been looking at the investing strategy called “core and explore”. I have the majority of my investments in a core investment portfolio, while I look to hedge this with more “experimental” opportunities. Thus, I’ve been exploring more aggressive and creative asset classes like precious metals, REITs, and commodities as great diversifiers for a balanced portfolio, but I make sure to cap my funds in these areas to minimize risk.
In addition, I’ve been investigating newer schemes and additional opportunities as diversifiers as well — stuff like lending through Lending Club, an activity that has been picking up some traction lately, in the online financial community.
5. Consolidate my 401k accounts.
When times are slow, I use this time as an excuse to organize our accounts better. It isn’t really market timing if we’ve got a good excuse to sell out and move into cash right? Well, because I’ve been consolidating my accounts, I’ve had to shift my funds into stable investments for the time being as I make the necessary transfers.
6. Focus on cash flow.
These days, I’ve been really giving my online businesses pretty high priority. In a poor economic climate, I feel that I need to work harder to make up for any losses I see in income. During a slump, we’re all just a tad bit more paranoid than we usually are, and by collectively focusing more on our jobs and businesses, we may nudge the economy forward. The economy may eventually sit up and take notice of this increased productivity in our labor markets.
If we can channel our fears into more productive actions, we’d not only do our finances good, but possibly also help influence the direction in which our economy is headed.
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{ 12 comments… read them below or add one }
There will be a bottom but to me its uncalculatable. I would rather focus my energy on making good investments that will make money in the long run.
Nice article with a good action plan. Your action plan is based on the sole assumption that the economy will recover by 2010. I too wish it does but do you have an action plan for:
A. the worse case: the economy does not recover by 2010 or
B. the worst case (as some of the top economists are predicting): the US dollar collapses?
How would you respond to those doomsayers?
When the market is beginning to show signs of bottoming, it’s definitely a good time to re-assess and possibly re-enter the market. However, I would be really careful about making investment decisions based on technical analysis, as those techniques are reserved for speculators and not long-time investors. Good luck in the coming year though! The market might have in store plenty of surprises for us yet
Agree with Sameer.
With the govmn’t printing money non-stop and reaching into our pockets more (corporate tax elimination that will translate into higher prices to consumers), buying banks and almost nationalizing other companies, the possibilities of a dollar collapse is very real. This can translate into hyper inflation, and economic unrest, at which time all investments are off
I would agree with you and think now is a great time to find some income producing investments. Investing in real estate as well as advertising costs should continue to provide a good value. The hard part is not jumping in quickly and doing some good research first.
@Dana,
Thanks for your input and thoughts on technical analysis. I don’t make decisions entirely on technical analysis — I always have a long term view. I do study technical analysis just to round out my understanding of the markets. I use it as supplemental information and research I take into consideration before making any decisions, but it’s a pretty small aspect of my decision-making.
For the record, I do take the long view, like to diversify and use indexing, and also apply fundamental analysis to my investment strategies.
That is great to hear, and I particularly like your idea of focusing on cash flow.
Talks of bottoming has been going on since last March, and doomsayers are out in droves (boom in doom?), perhaps signaling the so-called “unjustifiable pessimism”? In the meantime, the market continues to hit new lows if not going sideways.
Have you seen excerpts of Warren Buffett’s annual newsletter to shareholders for 2008 that came out this weekend? It’s surprising that even he made glaringly erroneous calls in 2008 on 1) ConocoPhillips, and 2) Irish banks. If this doesn’t demonstrate that investing is not for the faint-hearted, I don’t know what is!
Hi,
The market may recover in 2010 or it may not. Even if it does recover, most forecasters aren’t predicting an employment or housing recovery until 2011.
I like to follow this rule, in good times and bad…
“Hope for the best, plan for the worst”
Cheers,
Jeremy
One reason a bad economy is so good to investors is that many people give up on picking good investments. So you’re more likely to find an overlooked bargain, since so many bargains are getting overlooked.
But this time might be different: investment banks are laying off so many people that there are bound to be thousands who are unemployed and have nothing better to do than leaf through annual reports and crank out models in Excel. It could be the small-time value-investor’s recession!
I think the predictions of an upturn in the latter part of 09 may be a bit optimistic. I think that current strategies being employed are more likely to cause an extension to the pain. We still have a ton of toxic assets floating around and with derivatives in the mix it means you really can’t be too sure what investments are sound. I think a good strategy would be fleeing to a neutral foreign country, but since that is not an option for me I will attempt to pay down what debt I can and keep my investments limited to my retirement account and my local savings account. Not much else a person of limited financial means can do but just ride it out.
A good financial plan should account for good times and bad. Accordingly, I’ve made very few changes to my plans. My one really notable change is moving my eFund into cds at my local credit union. Better rates and nearly liquid with their early withdrawal policy.
This economy is taking a toll on everybody. I really like your list of what to do with regards to investing in this economy. I recommend adding one more: Remember what it’s like to go through a bear market. If you’re taking this very hard, you should consider modifying your asset allocation to an appropriate risk tolerance. This will not be the last bear market.