Recessions happen and they don’t just impact employability – they can cause big cuts to your savings. The average stock market correction is 13%, but the most recent downturn, dubbed the Great Recession, saw a 35.5% correction hit investors.
No one wants to see a third of their savings wiped out in a matter of months. A recovery back to peak can take years in some cases, and investors who aren’t over-exposed to stocks can actually turn corrections into an opportunity.
There are a few ways you can prepare for a downturn so that you can make more money.
Build a Defensive Position
If you have a truly diversified portfolio, you will have a defensive position. Stocks are higher-risk, higher-reward assets that generate dividends. But when things turn south, the losses are greater than other lower-risk assets.
While some Type A investors may be trying to beat the market, once you’ve built a certain amount of wealth, you should really be looking to build a defensive position that protects what you’ve already achieved.
Go Long with a Gold or Silver Position
Make gold and silver the foundation of your defensive position. Gold and silver are assets that tend to provide disappointing returns compared to the stock market, since they generate no interest and come with some higher carrying costs. But once stocks hit the rocks, everyone wishes they had gold and silver in their safe already. Precious metals historically benefit from recessions as jittery investors sell off stocks at low prices and try to get in on gold before it’s too late. Don’t follow the crowd; make sure you own gold and silver ahead of the crash.
Right now, gold and silver prices have been stable for years. It’s a great time to buy in preparation for a market downturn. Get more information about gold and silver prices before you decide to buy.
Rebalance Your Portfolio Every Year
Once a year, sit down with your portfolio and rebalance it. Have your riskier assets outgrown your original position? It could be time to sell some off and invest them in your defensive position. Correcting your portfolio once a year isn’t too meddlesome, but can help update things before a market correction.
Buy During the Dip
Defensive positions will help offset losses as assets like gold gain on stock market fears, but don’t be afraid to buy during the dip. The biggest dip tends to happen during the first part of the correction and investors slowly test the waters. Now is the time to snap up undervalued stocks, just be prepared to ride the ups and downs of volatility before you start to see returns. Market dips are opportunities to truly generate wealth. Everything from stocks to real estate will be more affordable.
Remember Your Risk Tolerance
Remember when your financial advisor asked you how risk tolerant you were? They asked because they know that recessions are inevitable. They happen every 4 to 10 years and they should be expected. When prices are plunging, don’t panic. One of the worst moves you can make is selling as the market bottoms out.
There are some legitimate reasons to sell during a correction, but if you’ve researched your investments, you should know which ones were big risks that didn’t pay off and which are sound investments having a bad day.
With these 5 strategies, you can survive the next downturn and even make money.