For those of you who might not be aware, the financial world has been struggling these past few weeks. With high unemployment, high inflation and even higher interest rates, the world seems to be bracing for an impending recession. Like in any scary tv show or movie (think Stranger Things), we never really know when a recession will pop up and eat away a part of our portfolios. So, what do inexperienced investors do to help curb their fear and reduce their losses? They begin to sell their positions ahead of time to help reduce their losses. This is happening right now as we have seen in the stock market where individuals are reducing their positions drastically while waiting for the other shoe to drop!
Although selling before potentially incurring a loss seems like a good idea to weather the storm of a future recession, one of the issues I have seen is that the people who feel the immediate need to sell certain stocks because they are concerned about losing their money tend to be people who might have over-leveraged themselves (people who invested money they might have needed) or people who might have invested in questionable companies hoping to make a high return in the short-term and might have been caught in a bad position for some unforeseen circumstance like increasing interest rates.
Another reason why people should not immediately begin selling their holdings when they are concerned about a recession is because, as history as shown us, most modern-day recessions are quite short – about three quarters or nine months. Assuming that your portfolio is made up of companies with strong financials rather than companies with a high-risk high-return horizon, do you think it really makes sense to start changing your entire portfolio for what might end up being an event that lasts less than a year? The reason why I say this is because those companies have not intrinsically changed, they might struggle more in an environment where interest rates are higher but, depending on what they produce or provide, will be able to adapt and to increase their prices or their services in line with the new socio-economic environment both during and post-recession. They will come back and the company’ stock will rebound.
Also, as we are long-term investors, we should not let short-term fluctuations change our long-term goal of growing our wealth. Every day the stock market will either go up or down but over the long-term we have come to expect an upward sloping curve as both the economy (GDP) and companies grow. This means that for those willing to get through a recession, there is still plenty of ways to make money (preferred shares, bonds, dollar-cost averaging and even dividend stocks) through investing that is safe and will not increase your overall level of risk. Even if we end up in a full-blown recession, you can keep your portfolio safe and potentially even make some money! It has been shown time and time again that nobody can time the market so in times of trouble and recessionary measures, you are better off making sure that the companies you own are good companies that you believe will still be around in 10 years and not sell, your future self will appreciate this decision more than you can imagine!
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