Authored by K. Thor Jensen in Investments
Published on 08-02-2009
I know, talking about investing during the last days of the recession we find ourselves waist-deep in seems like a fool’s game – why would any thinking American want to keep his cash anywhere but a coffee can in the backyard at this point? Well, it’s actually in many ways a buyer’s market out there right now, and if you have the liquidity, a well-placed investment or two can not only produce handsome dividends, but also get the economy moving in the right direction. In this article, I’ll offer a number of guidelines to follow if you’re considering expanding your portfolio during a recession.
First off, learn from what put the economy in a recession to start with. In the most recent case, that was bubbled tech stocks and a completely unmanageable mortgage market. The companies that were most exposed to these sectors should be virtually dead to you moving forward. In general, recessions make investors slightly more risk-averse, which is good for rebuilding but not as good for developing new technologies. In this case, you should definitely follow the herd and stick to purchases that have more dependability, at least until the market’s confidence returns. One purchase that is making a serious comeback is bonds – either corporate bonds or U.S. treasury bonds. The difference between the two is minimal – Treasury bonds are generally considered less risky, but offer a slightly lower return. However, the default rate on corporate bonds is typically under 1% – a very reasonable number. Whichever you choose, bonds are a fine way to anchor a new investment portfolio.
Secondly, take some capital into a money-market fund. These funds may not return at a level that high-powered investors would seek out, but they have one sizable advantage: they are guaranteed returns. With the risk removed, money-market funds are a compelling alternative to just letting your money sit in a savings account, especially if you think early withdrawal might end up being a possibility. A similar strategy is investing in bank Certificates of Deposit, which typically return an additional 2% on money market accounts. Investors won’t make a fortune doing this, but it’s a wise way to protect some value in a volatile market.
Another wise method of diversifying a new portfolio is investing in ETFs, or exchange-traded funds. These aggregations of stocks are tagged by the exchange they are bought and sold on, and insulate themselves from the volatility of individual companies by working from an index of money-market funds in the exchange. Investors in these funds can participate in early rallies where new companies perform well without bearing the risk of failure that individual stocks hold. If you’re looking to get your feet wet in the greater stock market, this is a very wise way to start.
Most importantly, diversity is key in a volatile market. Overexposure to any one source of return will punish the unwary, so the wise investor carefully parcels his eggs out among a number of baskets. Balancing low-risk investments with the occasional gut pick can lead to a fun, profitable source of income.