The global recession caused by the pandemic has created an unprecedented level of uncertainty, with investors seeking guidance and advice on how to navigate the challenging economic environment. While the stock market may be experiencing some tough days, that doesn’t have to stop you from finding ways to prosper. In this article, we will provide you with 5 tips for investing during a global recession.
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There’s no shame in sitting on the sidelines and saving cash or stable coins during a global recession. When bullish momentum returns, you will have plenty of dry powder to make big allocations. In the meantime, there are still lots of opportunities to earn yield across crypto markets as long as you trust the protocol you’re using. While this may seem like timing the market, it is more about spotting momentum and general market trends as opposed to more focused price targeting or calling reversals. Larger trends are easier to spot.
Dollar-Cost Average (DCA)
Dollar-cost averaging is a technique that involves investing a fixed amount of money at regular intervals, regardless of the asset’s price. This can help you build your portfolio gradually over time while reducing the impact of market volatility. Automated bots can help you execute this strategy, making it less tedious and more effective. While it may not be a glamorous strategy, it has a high chance of working out in your favor given a long enough time horizon.
Read also: Dollar-Cost Averaging (DCA), One Of The Best Trading Strategies
Find Assets That Outperform
A combination of the first two options can create a strategy that allows for some exposure to the market, which can help resist FOMO when the market rallies, even though your overall thesis remains bearish. Decentralized perpetual exchanges have been the darlings of the bear market. Many traders have flocked to protocols such as GMX and ApeX, which are up about 70% and 50%, respectively, this year. However, finding assets that outperform during bear markets is labor-intensive and going long during a downtrend is risky. This strategy should be approached with caution and is best used by investors with the experience to spot a good project and apply solid risk management.
Derivatives can be used to ensure profit in down-trending and sideways markets. For example, using options to create a “bear put spread” that allows you to make money when an asset falls by locking in a good selling price at a reduced rate. There are also pseudo-delta-neutral strategies that advanced yield farmers use to long and short both sides of a liquidity pool, reducing their exposure to the volatility of the assets they are holding. While the instructions for executing these strategies are easily available online, managing them and sizing your position can make or break these trades. They can be profitable in a bear market but should be used with caution.
Keep Your Head on While Others Are Losing Theirs
Unless you’re a free climber like Alex Honnald, you wouldn’t attempt to scale any kind of cliff without good safety equipment. The same goes for investing. An emergency fund that is kept in cash is a good starting point. It should cover about six months of basic living expenses and shouldn’t be used for yield, borrowed against or staked. You should also have a sinking fund, kept in similar circumstances (read: highly liquid) to pay for large expenses that crop up, such as car repairs or getting stuck in an expensive city for an extended period. The sinking fund will give you that extra buffer of support so you can keep your emergency fund pristine and use it only for its intended purpose.
In times of economic downturn, it can be tempting to sell all your assets and wait for the market to stabilize. However, this is not always the best course of action. There are several options available to investors, including saving cash, dollar-cost averaging, finding assets that outperform, using derivatives, and maintaining an emergency fund. Each option has its risks and rewards, so it is important to do your research and consider your risk tolerance before making any investment decisions. Remember, no investment is without risk, but with the right approach and mindset, you can still find opportunities to grow your wealth even during tough economic times.
Q1: Is it a good idea to invest during a recession?
A1: Investing during a recession can be a good idea if you have a long-term investment horizon and can weather short-term market fluctuations.
Q2: What should I do if I’m not comfortable investing in the current market?
A2: If you’re not comfortable investing in the current market, it may be best to sit on the sidelines and wait for the market to stabilize before making any investment decisions.
Q3: What is dollar-cost averaging?
A3: Dollar-cost averaging is an investment strategy that involves investing a fixed amount of money at regular intervals, regardless of market conditions.
Q4: Are derivatives a good investment during a recession?
A4: Derivatives can be a good investment during a recession, but they should be used with caution and only by experienced investors.
Q5: Should I keep all my emergency fund in cash?
A5:It is generally recommended to keep your emergency fund in cash or similarly liquid assets, so that you can access it quickly in case of an emergency.
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