Recession effects on crypto & financial markets: how to make your investment portfolio plan for the next market crash
In general, the most powerful influence of recessions occurs within the young generation. For so many people, the frustration over the recession has not receded – it has only been replaced by the dread of a more upsetting present. We can cross our fingers and hope that we are finally moving out of that experience. Only a few know that a smart investment portfolio plan may reduce a possible headache.
However, recessions are notoriously difficult to foresee, and sometimes are hardly recognizable even after they begin. Since economists are predicting an approaching recession the only question is… how can people prepare themselves for the potential devastation?
According to The Goldman Sachs Group, American multinational investment bank and financial services company, “Investors should increase portfolio defensiveness given our forecast for heightened risk and fat tails.”. With the predictions like that it seems to be the best time come up with a solid investment portfolio plan that allows you to avoid stress and worry that can go along with market volatility.
Diversification of your portfolio restricts the damage to your financial well-being in case one asset fails. Also investment portfolio plan should be reasonably based on your knowledge, invest in industries that you understand but keep your eyes open for promising opportunities.
Here’s our take on how to plan investment portfolio and avoid damage to your financial well-being in case one asset fails.
Cash, the percentage of Net-Worth: 35%
Every investment portfolio plan should include cash because it has multiple roles that could bring a lot of advantages. Cash has always been a necessity in everyone’s life. Beyond the basic needs, money is needed for everything varying from education to simple fun activities. Financial security provides us independence.
When it comes to investment, cash can be beneficial for aggressive traders. Aggressive traders have multiple transactions open and are constantly looking for new ones, in these moments when opportunities open instantly cash are needed the most without any confirmations.
Another compelling reason to diversify your investment portfolio plan with cash is that you can liquidate it quickly. When the opportunity is spotted you can easily use your cash without worrying about banks competitive terms.
There is no doubt that it is always a good idea to have some extra money available in case of an unexpected emergency. Experts say that during these unforeseen times a person should have an amount of more than half a years expenses. In case of recession, there is always a possibility to get laid off since the unemployment rates are getting higher. Unexpected medical expenses to maintain your health could bring you a lot of losses. For these reasons, it is extremely important to be prepared and has ready to use cash.
Most investors tend to focus on the future rather than the past. So even though in the past including cash into your investment portfolio was a high risk, now it is regarded as the most-risk free position. Keeping more cash reduces your potential losses but, also, profits. There is no possible way to increase one without increasing the other.
Commodities, the percentage of Net-Worth: 30%
Many investors avoid adding commodities to investment portfolio plan because it is considered to be highly risky. The complexity and volatility of prices that happens every 10 years or so, discourage people from investing. However, organized commodity investment can be extremely beneficial for your portfolio.
Commodities are trading below their costs of production, usually, when commodities rise, bonds and stocks have tendency to fall. The financial crisis that can affect stocks and bonds do not affect commodities in the same way.
For example, natural disasters can lead to decrease of an investor’s assets. These events could have a massive negative impact on stocks and bonds. However, these disasters may lead to a rise in the prices of goods and services. Furthermore, it is easy to liquidate investors position whenever buying or selling the commodity.
By adding commodities to investment portfolio plan investors could increase value and reduce volatility. Commodities usually move in long-term cycles of 10 to 20 years so it typically works well as a long-term investment that could improve the consistency of incomes.
Over history, precious metals always trade positive during the recession. During the last financial crises, gold price quickly rebounded and got higher. The fear among investors causes them to shift to gold because it has been considered a safe haven for many years. The silver price was not as shifty as gold, however, considering the fact that when a recession occurs all prices have a sharp fall, silver still performed better than other commodities.
Cryptocurrency, the percentage of Net-Worth: 20%
Aleh Tsyvinski, famous economist and lecturer at Yale University, stated that every investor who believes bitcoin can perform as well as it did before, should include at least 6% of their financial assets into crypto as part of their investment portfolio plan for the future.
Fundstrat Global Advisors conducted a survey and found that close to three-quarters of institutional investors believe that value of cryptocurrencies will rise during a recession.
There are a couple of different theories on what will happen to the cryptocurrencies when the next global market crash occurs. One theory supporting why you should include crypto into your investment portfolio plan is that cryptocurrencies will thrive in the downfall and could outperform traditional investment classes. This is due to crypto being fully decentralized, less of chargeback risks, lower transaction costs, a higher level of security and full support for mobile devices. On the other side, there are the ones who are convinced that it will be the end of the crypto world. This theory says that investors will get spooked by the decreasing prices and try to sell off the cryptocurrencies, after that decline, it will never recover.
Nevertheless, it seems like cryptos have the resistance to usual effects of financial markets. However, since Bitcoin was released only in 2009 by Satoshi Nakamoto and recession happened in 2008, it would be naive to think that currency which has not been tested during the big crises could be completely immune. Another financial crisis will be the proving point for cryptocurrency and opportunity to shine.
Nowadays it seems like everyone already knows about Bitcoin. It is the most popular and global cryptocurrency suggestion to add to investment portfolio plan. Over the years since Bitcoin was first established the price had an enormous change and made a lot of people very rich. Since then Bitcoin has come a long way and a number of services and shops are adapting crypto payment which reflects growing usage. You can even use a Visa credit card that is automatically debited from a consumer’s bitcoin wallet. Having in mind that recession is around the corner investing your money into a currency that allows people to have privacy and avoid banks having control over your money seems like a wise choice.
Bitcoins biggest competitor and second most known crypto that offers a variety of pros is Ethereum. Ethereum should be a part of your investment portfolio plan beause it is not only decentralized digital currency that can be used for transactions but it can also be used for building and running applications. An advantage of Ethereum is that transactions take less time, furthermore, it has infinite supply while there are only 21 million Bitcoins. Ethereum is more than just a cryptocurrency but also a multipurpose system that brings positive outcomes when it comes to revolutionizing industries and services.
The third big player in the cryptocurrency market is Ripple that stands out from others because it is part of the whole network that offers currency and information transactions. Ripple attracts major investors and dozens of banks have already adopted it as a basis for payment transactions. Ripple system is only going to increase the number of users that is why the value of cryptocurrency should go higher. However, since the XRP is being held by a single company it means that it is not as decentralized as Bitcoin and Ethereum.
These are the three cryptocurrencies that have the largest market share and the highest adoption rate at the moment, therefore, should be first to considered adding to investment portfolio plan. However, before jumping to the conclusions to whether invest into crypto or not, rational decisions have to be made to determine goals and objectives.
Constant declines in cryptocurrency prices cause a lot of concerns for the investors. However, there is a way how to profit from these collapses. Short trading during these times is the most appealing alternative to avoid losses. Like any other trading technique it comes with high-risk so needs to be understood and analyzed. You can find more information on trading strategies and risk management in this free eBook.
Stocks, the percentage of Net-worth 15%
For investment portfolio plan only 15% are for stocks. Over history, stocks showed a lot of potential growth over the long term. On the downside, stocks tend to be the most volatile investments during the recession. When building your wealth the main key to successfully manage stocks is not to get nervous when the prices are going down, because when the market recovers you may even get in a better position.The earlier you add stocks to your investment portfolio plan the better chances are of preparing yourself for a comfortable retirement.
Another advantage of stocks is that they are easy to buy and sell. The transaction prices are low and some online brokers even let you sell stocks for free. It would only take minutes to liquidate stocks in case of a sudden need of money.
The main disadvantage of investing in stocks is that you are competing against the best traders that have professional tools and knowledge over the many years of investing. Such investment entities and professionals are the first to notice a shift in stocks value movement or change in market sentiment as a whole. Therefore, they would always outplay an individual investor. Another con is that in case of company’s bankruptcy independent investors are the last ones to get paid for loses, so unfortunate timing can simply destroy your returns.
Considering these factors the main thing to do in this situation is to invest in stable companies and into many different stocks. During economic downturns consumers tend to change habits because many people lose their jobs, this leads to choosing cheaper goods and staying at home. That is why including fast food, media and soft drink companies stocks to your investment portfolio plan is always a good idea.
One of the companies that performed well during the last devastating recession was T-Mobile. The company is in constant development and upgrading to 5G technology which caused an unexpectedly higher number of new subscribers. During last year T-Mobile achieved record service revenues of $8.1 billion, up 6% and continues to grow. Long-term investors should highly consider about the possibility to add T-Mobile stocks to investment portfolio plan because it might bring great results.
Another company that survived the last recession without experiencing huge loses was McDonald’s. One of the strongest fast food brands on earth with affordable prices is still practically unbeatable. The restaurant chain’s global comparable sales rose 3.5%.
McDonald’s are renovating and bringing new features to the restaurant, such as mobile ordering and self-ordering kiosks. These initiatives can help to increase stock price in the near future. McDonald’s is a powerful company with growth prospects and rising dividend.
Soft drinks industry giants that bring steady returns are Coca-Cola and PepsiCo. Over the years both companies increased its dividend and still stay at the top from a value point.
Coca-Cola has set a high bar for its competitors and is still leading. The demand of healthier beverages guarantees companies spot at the top since it has the highest diversity compared to others. Coca-Cola is a complete dominant in the market that shows flexibility when it comes to pricing.
PepsiCo chose the other way, instead of focusing on healthier drinks, company invested in most popular snack brands like Lays, Doritos and Bare Foods. Both companies provide diversification but Coca-Cola is more profitable. During the last financial crises company experienced minimum losses and is considered one of the safest investments during the next one.
In conclusion, when it comes to the diversity of an investment portfolio plan, there are a lot of factors to consider. By educating yourself and using the knowledge and tools in investing you can pick the right opportunities and help you spot the ones to avoid. Diversification of your investment portfolio plan is crucial part of risk management and profit maximization. Do not get scared when the markets have downs, there is always a way out and you can always prepare yourself by adding the variety of valuable assets.
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