An economic downturn can either be a scary or an exciting time to invest, depending on how you look at it, and depending on the type of investor you are.
Aside from how returns can be lower than usual during this period, you also won’t know how long it’ll take before the situation starts to get better. And it being a ‘down’ turn, it can also create an opportunity for investors, old and new, to pick up fundamentally-sound investment outlets with very good potential to bounce back.
Of course, this doesn’t automatically mean that you should abandon your investing plans, especially if you’re in it for the long term.
After all, adding to existing investments will help you follow your peso-cost or value averaging strategy. In return, you’ll have a chance to reap more benefits when the economy is in better shape as compared to if you just stop putting money in.
However, there are 3 major things you should consider before making a new investment at this time.
Economic outlook
While there’s no real way to know how long the economic downturn will last or how low asset value will drop, staying updated on the news and listening to expert forecasts can help you see if you should push through with your plans for a new investment.
For example, if you’re considering buying bonds at a time when interest rates are likely to increase in the near future, you can factor in the possibility that the current bonds may have returns lower than those of upcoming ones. This would have an impact on the price of the bonds that you buy now.
Higher bond yields are also likely to affect stocks. That’s because the former may be seen as more appealing, since investors may prefer their fixed-income nature over the volatility of the latter at a time when the markets are down.
The good thing about being updated with forecasts and outlooks is that in the process, you get to understand how fund managers, analysts and economists think, and you also appreciate different perspectives. These broaden your horizon and deepen your knowledge about the market.
Your intent
What will you be trying to achieve with the new investment? If you’ll be trying to reach a money goal, you may have a hard time if the growth potential is low (unless your goal is modest, your time horizon is far away, or both).
In this case, you’ll need to take the time to find an investment product that might give you the returns you’re looking for without taking you beyond your risk comfort level.
If you’ll be trying to balance any new volatility present in your portfolio, you’ll need to see what you already have and choose the new investment accordingly. Remember that even formerly stable assets may see a drop in value because of the downturn, so make sure to check everything.
You might also want to consider putting your money in safe havens to help preserve its value. If you decide to do this, you should find out first which assets are likely to keep or even grow their value at this time.
This is not something exclusively being done by newbies and beginners. Even seasoned investors ‘park’ their funds in safe havens during times of uncertainties and just re-deploy to more risky assets when they start sensing recovery.
Portfolio condition
Last, but certainly not the least, is looking at how your portfolio is doing. Having below-average returns is to be expected, but that doesn’t automatically mean that you should focus all your financial resources on new investments instead.
Remember that once the downturn has ended, there’s a chance that your money will again start growing at the rate you’re used to. It’s also possible that the new investments which may have performed better during the tough time will be less fruitful when the situation is back to normal.
All in all, there’s nothing wrong with making new investments during a downturn. You just have to look at the potential effects and weigh the pros and cons so you can make the decision that’s right for your financial future.
