How to Invest Wisely in Uncertain Economic Times

Practical Investment Tips for Uncertain Times

Economic uncertainty has a great impact on our financial decisions. Whenever economic circumstances turn volatile, the return on investment and the personal financial situation change rapidly. Try putting yourself in the position of an investor in such a case where you would not want to expand your portfolio or buy any new asset. The instinct is nothing out of the ordinary; people stay clear of investments when the future is clouded. Why? Because once you've committed your funds, it's not always easy to reverse course. Many would-be investors remain in 'wait and see' mode, awaiting sharper market signals before making their move.

Investments often require significant fixed costs and a big differential between buying and selling prices, making potential investors coy about tying up their money. Additionally, uncertainty in finance translates to misguided investment, thus reinforcing other barriers.

Hence, during such times of turbulence, people are more or less cautious with their money and avoid any redundant or risky expenditure. People either postpone their plans for investment or change the plans in a manner that ensures they incur minimum losses. Fundamentally, this caution defines investment behavior under uncertainty.

But let that not deter you! In the following sections, we give you a few tips, easy for beginners, on how to handle investments during economically unsure times.

Let’s get started!

What Is Economic Uncertainty?

Economic uncertainty is a situation in which future economic circumstances are either incapable of reasonable predictability or involve significant risk.

Economic uncertainty is not a prognosis for millennials and Gen Z; it's a fact. These two generations grew up seeing the ravages of financial crises, rapid technological changes, and geopolitical uncertainty. Much of their education and formative years in the workforce coincided with the pandemic time of COVID-19, which stamped long-isolated impressions on them. Many from those generations rightfully feel that they will carry the emotional and financial scars of extended quarantine periods for many years yet to come.

This is the lived experience of unpredictability and disruption that informs their view about financial stability and economic prospects. Whereas financial uncertainty might have been thought of by previous generations as periodic or cyclical, millennials and members of Gen Z often see it as a continuing backdrop for financial decisions and career choices.

What Causes Economic Uncertainty?

Unstable Financial Markets

Such broad and volatile changes in the stock exchange and exchange rates would create an uncertainty effect. We had it in the financial crisis in 2008 and also during the COVID-19 pandemic. Most countries have changeable exchange rates pretty frequently, which makes investment risky.

Government Policy Changes

Sometimes the government changes tax rules or the central bank changes interest rates. These changes can make the economy uncertain because people and businesses aren't sure what will happen next.

Natural Disasters

Examples are earthquakes and hurricanes, which cause business discontinuation and uncertainty. Climate change makes it worse, especially for poor countries, which are easily affected by such events.

Political Issues

f a country undergoes political turmoil, businesses and investors would be very much unwilling to invest in such a country. It makes the economy less stable.

Big Events That Sowed Uncertainty Recently:

The COVID-19 pandemic (2020-present)
The Global Financial Crisis, 2007-2008
Brexit 2020
The U.S.-China trade frictions
The Russo-Ukrainian War (2022)

These are examples showing just how quickly economic circumstances can change. Thus, it explains why, specifically one has to be aware and prepared for insecure times.

How to Invest During Economic Uncertainty

Determine your investment purpose

To generate funds for financial goals and immediate needs
Building wealth or an emergency fund to diversify and supplement an income stream
To retire and build up some nest egg
To eliminate debts and enhance your credit score

Gaining more assets may require at least 5 to 10 years since investing is a medium—to long-term commitment. Investment Return In such time, one can be assured of reaping a satisfactory return on investment. If the funds are needed much sooner than this, then saving might be more appropriate than investing.

Assess your risk tolerance

Every investment can be volatile regarding the economic condition and other factors. Risk-taking is vital to obtaining good returns. Thus, your risk tolerance may influence your investment goals.

Before investing, consider your financial circumstances, economic conditions, market economics, and other factors pertinent to your decision.

During periods of economic uncertainty, markets generally generate lower returns and negative growth. During recessionary times, a particular stock may sell for less than the actual value. Most pros advise a long-term perspective and never invest in stocks because they appear to be "on sale.".

Choose your Investment Period

Generally, the longer you invest, the higher the potential for a return on investment. Still, you will need to estimate your period of investment based on your goals. Short-term investment-think at least 5 years; medium-term, 5-10; and anything over that is a long-term investment.

Develop an Investment Strategy

Identify your needs and objectives.
Assess your risk tolerance and time horizon.
Study investment options
Begin with low-risk investments
If comfortable with risk, consider medium-risk investments.

Once comfortable with the previous risk tolerance levels, consider high-risk investments.

Diversify your portfolio

One of the best ways to invest when the economy is bad is to diversify your portfolio through various investment products. This strategy works because different investments react differently to factors such as economic instability, interest rates, political events, conflicts and weather phenomena.

Thus, it is a low-risk way of diversifying your portfolio.

Example diversified portfolios for beginners:

Ray Dalio's All Weather Portfolio: Designed to perform well in any market condition with 40% Long-Term Government Bonds, 30% Stocks, 15% Intermediate Government Bonds, 7.5% Gold and 7.5% Commodities.
60/40 Portfolio: 60% Stocks and 40% Bonds
25/25/25/25 (The Permanent Portfolio Allocation): Cash, commodities, stocks and bonds are invested equally.
Large-Cap Blue-Chips: Invest in large US companies with strong earnings, multiple products, and resilience in economic downturns.
Dividend Portfolio: Emphasizes stocks that pay dividends to shareholders even if stock values decline.
Value Portfolio: Aims for undervalued and neglected stocks.

How to Invest Money and Diversify Your Portfolio in Economic Uncertainty

Liquidity of the investment portfolio should be maintained.

Keep some of your portfolio in cash or extremely liquid securities.
Avoid liquidating investments to raise cash during a recession.
Consider investing in utilities, consumer staples and defense stocks, which are less vulnerable to economic recession.

Use dollar-cost averaging

This is a strategy of investment whereby equal amounts are allocated periodically rather than making one single lump sum investment. The amount and duration are at your discretion. During times of economic uncertainty, this approach can be used to invest new monies or reinvest dividends by using the current market pricing.

Consider dividend stocks

Dividend stocks are frequently cited as dependable investments during recessions. You will continue receiving dividends, even if their stock prices decline. "Dividends can signal strength and are a way to dollar cost average into the market during turbulence," says Michelle Griffith, Citi Global Wealth advisor.

Defensive Stocks: Explore

Focus on non-cyclical sectors like utility stocks or consumer staples. Stocks in such sectors generally are less prone to economic downturns and hence may shield your portfolio.

"Non-cyclical investments are usually those companies that sell 'essential' services and goods, things such as food, electricity and shelter, and have lesser exposure to economic cycles," said Brian Katz, chief investment officer at The Colony Group.

Employ bond and uncorrelated asset classes

Bonds may be good in times of recession, but Brian Katz suggests investment-grade bonds. "Uncorrelated asset classes like royalties, insurance-linked securities, and carbon credits may show relative strength when traditional asset classes are weak."

Things to Avoid Doing in a Recession

Growth stocks

The exposure to such growth stocks should be worth limiting. "Growth stocks, especially those unprofitable companies that attach high growth prospects, underperform in recessionary times," says R. Nakadi, head of investments at BNY Mellon Wealth Management's Global Family Office. This calls for one to focus on income-generating investments and dividend-paying stocks.

High-yield bonds

High-yielding bonds are riskier than government debt securities in times of recession. The issuers are mainly small, leveraged firms that stand a fair chance of default during periods of uncertainty.

Stocks of highly leveraged companies

Carefully consider the profile of a company before investment. Companies whose balance sheets reflect huge debt could, upon economic recessions, experience declines in stock prices.

Consumer discretionary companies

While consumer discretionary stocks like Tesla may be popular, they provide non-essential goods and services, unlike utilities and healthcare. These stocks may underperform during economic downturns.

Other speculative investments

Speculative investments have the possibility of yielding highly, but they are also very risky. Examples include penny stocks, which perform poorly in recessions as investors pull out of the market. Cryptocurrencies, such as Bitcoin, are also speculative in nature. They do not pay dividends or earn a profit, often with pricing volatility and losses during economic recessions.

Safe Investing for Beginners: Tools and Resources

Best Investment Apps for Beginners:

SoFi Invest Best Overall: Investment App For Beginners
Acorns Invest: Best automatic investment application for any novice
Ally Invest: Best overall runner-up investment app for beginners
TD Ameritrade: Best for active trading investment applications among beginners.
Public Investing: Best for socially responsible investing beginners
Stockpile: Best investment app for kids for beginners

Information courtesy - Businessinsider.com

Educational resources:

Data courtesy - money.usnews.com

Conclusion

If you are an experienced investor and are using your funds for the long term, sudden economic uncertainty shouldn’t worry you. You can liquidate some of your small but short term investments and get some profit in your bank account. But don’t sell off your good long term investments out of fear. Prices may be low now, but they will get back; nothing is permanent!

Be patient and invest in recession-proof sectors like consumer staples, utilities and healthcare. Buy dividend stocks to get returns for many years. Invest in real estate and gold or silver as they are not affected during the market slowdown. Diversify as much as you can to avoid unnecessary risks. Good luck!