In the series “Money Bear Club Answers”, Money Bear Club will publish the best answers from its Quora profile. The answers will range widely from business and investing, to budgeting and the philosophy of the everyday life. Read on to find out more unconventional perspectives and solutions!


Originally answered: November 3rd, 2018.

Question:

Answer:

dealing with a recession
Two ways to deal with a recession in relation to investing. Copyright: Money Bear Club.

There are two strategies to deal with a recession: holding in cash, and making money from a recession.

The first strategy is easy, and fits conservative investors. You would sell the majority of your stocks, financial derivatives and other assets that deal with the stock market. The money from the sales then would be held in cash through the recession.

The second strategy is harder. You could try to find companies and industries that won’t lose value in a recession (Industries to watch for the coming dip), and invest in them. You can also try trading options puts, or short selling stocks that you think are going to lose value.

Also, you can try putting money in gold, which tends to increase in value during recessions. Maybe that happens because of all other investors using the same strategy?

How wise is holding money in cash? If you aren’t chasing after gains, then, doing so would be very wise. Holding in cash, and not investing, is the best protection against making bad decisions during a dangerous market period.

However, don’t think that there isn’t a negative side to holding money in cash and reinvesting after a recession/crash.

Inflation is one factor. The money that won’t be invested, won’t grow in value. If it won’t grow in value, it won’t beat the inflation numbers.

If it won’t beat the inflation numbers, your money’s value will decrease. If you are prepared to lose ~3–5% of your investment value, then holding in cash is a wise move for you.

Also, reinvesting after a recession or a crash won’t get you the best deal on an investment. Think for a moment: you have to buy low and sell high to make a profit. And when is the price of an asset is going to be lowest: during the worst month of a recession, or at the end of it, when the economy is picking up pace?

Investors that have fewer than 10 years until their retirement should not risk losing their investments, and holding in cash for them is imperative. Other investors should decide based on their risk tolerance.

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