Most of us think that recession is a time when we cannot make good money by investing in the markets. But in reality this is not true. If you look at history, you will find that many great businesses were born during recessions. Recession offers many hidden opportunities and you need to seize them by understanding the basic rules on how to prosper in uncertain times. During this economic crisis, you can make some good long-term investments that will yield you fantastic returns in years to come. However, you should never put all your eggs in the same basket. Diversifying will help to protect your investments and will also give you great returns in good times or bad. There are certain golden rules of acquiring wealth that work in all times. Let's explore the various investment avenues:
Bonds and Bank Deposits
You should place some of your cash in some safe instruments like bonds and bank certificate deposits. Since these certificate deposits give you predictable and fixed returns, it is a good idea to park some cash in them. This can be that portion of your money earmarked for emergencies but not required on a day-to-day basis. You can also consider investing in US treasury bonds that give you low but guaranteed returns if you hold them till maturity. Investing in corporate bonds is also a good option. However these are riskier because of the possibility of default by the company issuing the bonds.
Invest In Company Stocks
You should invest some money in stocks of publicly traded companies. But do not expect immediate returns. This is the time when many good stocks are available at dirt-cheap prices and buying them can help you earn very good returns when the stock market recovers. Since, it is very difficult to exactly time the stock market and find a bottom you should invest regularly in the stock market. You should buy stocks of blue chip companies as they usually have high probability of growing at a good rate. But if you have any lemons in your portfolio, get rid of them. Some people do not prefer to sell stocks at loss. If you do not trust the business, it is best to sell its stock even if you are at loss.
This is also a good time to reshuffle and realign your portfolio. You can also hire portfolio management services to help you in this. Many portfolio management services have reduced their fees in order to improve their business. Some financial market web sites also offer good advice on investing. They regularly give you stock picks, buy and sell signals that can help you to earn maximum profits. You can also earn good amount of money by short selling in this volatile market, which means you sell when stock price is high and buy again when the price is low. The traders use this strategy to make money in the stock market. However, the amount of money you should invest in stock market depends on your risk appetite and age. Young people can have a larger portion of their portfolio invested in the stock market.
Exchange Traded Funds (ETFs)
You should invest some part of your money in Exchange traded funds or ETFs for short. These ETFs are similar to mutual funds but trade like stocks on an exchange. There are different types of ETFs. Some ETFs represent a particular segment of the industry like biotechnology, energy, agriculture or gold, while some represent stock indices like Dow Jones Industrial Average, S & P 500, Brazil's Bovespa or the German DAX. There are also some ETFs that solely consist of stocks of dividend paying companies. It is necessary to choose ETFs that can earn good returns and beat the market. Since these ETFs diversify their holdings over stocks of different companies, the risk is comparatively lesser as compared to investing directly in stocks of individual companies.
It is important to invest some money in precious metals like gold and silver as they provide you hedging against inflation. When inflation is low, gold prices are low and when inflation is high, gold price soars. So investing in gold provides you insulation from inflation. Since, it is not possible for individuals to purchase gold in bulk to make considerable gains from changes in the gold prices; it is good to buy a gold exchange traded fund. The fund buys gold bars and then deposits it in a bank on behalf of their investors. The investors can thus earn profits using the changes in the gold prices.
Index ETFs invest in the stocks that are part of a particular index like S & P 500 or the Japanese Nikkei. These funds have their portfolio in such a way that their returns closely follow the index, which means they give returns in accordance to the changes in the index they track. The investments in such ETFs are relatively low risk as compared to investments in individual company stocks due to their diversification. The operating cost of Index ETFs is low and hence you can enjoy better returns.
Mutual Funds
If you are new to the stock market, have a low risk appetite or do not have time to closely track the market, then you should consider investing in mutual funds (or ETFs) only. Over a long period of time these funds give better returns than bank certificate deposits or bonds. There are different kinds of mutual funds available. You should check the track record of the mutual funds before investing in them. A beginner should invest regularly in a mutual fund to average-out the costs of acquiring these units. This means you can buy more when stock market is under performing and less when stock market is moving up. This strategy also works well during periods of high volatility when it is difficult to time the market. It is advisable for beginners to invest in those mutual funds whose portfolio comprises of global blue-chip companies. These funds will give you a more stable return with less volatility.
If you invest your money regularly in the above given instruments, you can earn good returns. You should remember that many rich people acquired their wealth by investing during a recession because they followed the aforementioned golden rules of acquiring wealth. So, forget about all doom and gloom flashing everywhere on business channels, newspaper and magazines. Use your wisdom and take help of financial planners to invest wisely.
