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Cautious investors can shield their finances in a turbulent economy by doing things like paying down debts, building up an emergency fund, and converting to cash equivalents. If you fear troubled economic times ahead, these five strategies can help to protect your investments.
Key Takeaways
- When faced with economic turmoil, savvy investors will make sure their emergency fund is well-supplied and will proactively pay down variable-rate debts.
- Fixed income can be a safe haven in tumultuous times, but it is not without risks as well; beware of duration risk and similar factors.
- More risk-tolerant investors might consider playing a downturn through the use of short sales and put options, and by using tax-loss harvesting to offset capital gains taxes.
1. Bulk up Emergency Savings
If you fall short of the recommended three to six months of income set aside in a liquid account for emergency purposes, don’t fret—saving just a small portion of each paycheck can help to build up a nest egg you can rely on if times get tough.
2. Pay Down Debts
Investors with solid emergency savings might consider paying debts more aggressively when faced with volatile markets. Debt consolidation through the use of a fixed-rate loan to help pay off higher-rate balances may be an option too, though it’s important to keep a close eye on rates during turbulent times.
3. Review Fixed Income Investments for Rate Risk
Investors flock to fixed-income products in volatile markets, which can lead to higher bond prices and lower yields. Then, as interest rates increase, bond values decline. Duration risk reflects the sensitivity of a bond’s price to changes in rates. Before immediately jumping to fixed income, be sure to understand the risk profile as it compares to your tolerance.
4. Hedge Your Bets, If You Can
If you’re bearish about a particular stock, consider selling short to capitalize on a declining price. You can also use put options to benefit from a drop in share price. Investors looking for a simpler or less risky option might consider moving investments toward safe-haven assets like precious metals or defensive plays. Diversifying your portfolio more broadly is usually a good idea in troubled markets.
Important
Short selling and the use of derivatives is an advanced investing strategy that is not appropriate for all investors.
5. Make Taxes Work for You
If you have realized gains in a part of your portfolio but losses in other areas, you can utilize tax-loss harvesting to offset capital gains taxes. By selling securities at a loss, investors may be able to claim a credit against gains in another area, ultimately saving in tax payments. This strategy is also somewhat sophisticated but can be a helpful way to make the best of a bad situation if some securities in your basket are down.
The Bottom Line
When times get tough in the market, the key is to not panic. Investors with a strong plan and a good sense of their long-term goals who do not flinch during volatility often emerge on the other side mostly unscathed. Still, this doesn’t mean business as usual if there is a high degree of turbulence. Approaching volatility cautiously but with a clear idea of concrete actions to take reduces the risk of impulsive decisions that can magnify losses.
