Investing 😳💰 during 🙈a🥺 Recession😬 🥰💸
Investing 😳💰 during 🙈a🥺 Recession😬 🥰💸
Just because the stock market is down doesn't mean you should stop investing. Here’s why you need investment automation
Are we in a recession? The answer may depend on which news network you turn on each morning. Your grandfather, desperate to prove “how messy things in Washington are” may assert so, but at the same time, your economics professor (mine included) will claim we are not- not yet at least.
Wherever you turn your attention, the official position is undecided, as the National Bureau of Economic Research, the authority on declaring a recession, is still unconvinced and waiting for more evidence. NBER’s definition requires a “significant” decline in economic activity, which many analysts believe cannot be said for the US economy just yet.
The effects of the current downturn, recession or not, are widespread. Since this year’s beginning, the S&P 500 has dropped roughly 24%. For the vast majority of us, portfolios show a startling amount of red, which leads to the question, how do we invest properly during a recession?
First, let’s clarify the importance and advantage of investing in a bear market. Namely, many companies are likely undervalued due to the effects of the overall downturn, so it’s often a good time for traders with extra cash to pursue investments in companies with either a history of prolonged growth or a profound potential to grow in the future. “Buy low, sell high” is the mantra of trading as a whole, and we’re in an era where the buy low option is all around us.
Moreover, there exists an abundance of companies with recession more resistant business models. Identifying these firms makes the list of smart investment options longer than one would expect in a period of economic slowdown.
So how exactly does one take advantage of the surrounding crumbing of markets?
Make defensive stocks a key part of your strategy
Stocks that will either be less affected or more enduring of a recession are often consumer discretionary stocks or stocks that produce consumer goods and command strong brand loyalties among customers. The enduring brand names of American households can be predicted to almost always give a positive return on investment within 5 years. These include:
Retailers: Home Depot, Amazon, and Walmart all rank among the top companies that sell products Americans will always need. Whether online or in person, these companies often follow the cyclical pattern of the overall economy, almost promising that after a short time they will return to their original peaks.
Automobile Manufactures and Related Industry: Toyota and Ford command huge markets across the nation, and all possess large bases of consumers with strong loyalties or preferences. Moreover, companies like Tesla have recently exploded with changes in technology and climate awareness and signal bright futures of growth whether or not the economy slows.
Even though these sectors often fall with the economy as a whole, their cyclical patterns of behavior and strong loyalties spell a future that emphatically states that this period is not the end for these powerhouses.
Dollar Cost Averaging
One of the best methods for hedging your bets within investing is dollar cost averaging one’s investments. This means insulating against one’s possible overreactions by periodically investing a roughly equal amount of funds into all new investments.
It may be tempting to believe a stock has bottomed out and then pour cash into new shares, but more often than not an individual investor won’t catch the absolute bottom of the stock’s fall. Invest hundreds, even thousands of dollars in a stock as you think it has reached a bottom, and you may see the stock fall large percentages further before it rises again as you expected. Through dollar cost averaging, returns will be more averaged out if you will, as smaller investments as a stock is falling will catch the dip and not present as much of an opportunity for your portfolio to tank altogether.
Building a Simple Dollar Cost Averaging Strategy on Daedalus
On the Daedalus platform what we’ve built is a drag and drop visual editor allowing anyone to automate their investment ideas. Say you are very bullish on BMAQ. The responsible thing to do is not to go out and spend all the money you wanted to invest in it all at once, but to spread it out over a period of time. On the Daedalus platform all you would need to do is set up a simple strategy, set it live, and then forget about it. It will automatically execute. This will save you the time and stress of having to constantly check the markets, and removes the cognitive load and emotions from your stock purchasing decision making.
Diversification in Bonds and Dividend-paying stocks
Even though the vast majority of stocks will fall during a recession, some will plummet and some will drop, certainly not equally. Diversification into relative winners and losers will lead to less devastating losses and a better imitation of the strong stocks within an index that will, historically, rise again.
Especially, consider Dividend-paying stocks. If stock prices are falling or stagnant, many investors will look to dividends to get paid. Consequently, companies that pay higher-than-average dividends should be appealing to investors during bear markets.
Further, Bonds have always been an attractive option during periods of recession due to their tendency to move in the opposite direction of stock prices. For many, bonds are an essential component of one’s portfolio, but investing further in short-term bonds during periods of crisis will help to limit suffering through a recession.
Automation (Here’s where we come in)
Consider what we’ve said so far about the importance of staying on top of your investment strategy throughout a recession and you’ll find a resolution to get your portfolio back on track within what can seem like a crumbling world. However, simple strategies like the ones we listed are not easy to implement, this would likely take hours of research every week and even with that, the odds you’d follow through on your rational plan rather than panic in the case of sustained losses or gain overconfidence in the case of extreme gains are slim. Automation removes the emotions from the investing process.
What may be more achievable for an investor, is to create a well reasoned investing strategy that takes the stress and emotions out of investing. Daedalus allows you to automate your own strategy, even- focusing on recession-resistant stocks or whatever you have faith in the cyclical return potential of, and take your success into your own hands. On Daedalus you can do this without writing a single line of code.
Recessions are periods that require the most caution and planning to navigate through effectively. This makes algorithmic trading, with its ability to insulate against emotion and actively manage your portfolio by responding to changes in the market quicker than you ever could effectively one of the best options out there. Join Daedalus, as we put the power back in the hands of every day people, and take algorithmic trading to the portfolios of anyone seeking easier, faster, and more reasoned responses to the market.