Legendary Wall Street investor Ray Dalio reckons that “cash is still trash.” And he’s not wrong. In fact, despite nominal interest rates soaring, the real interest rate is actually negative. This means that if you’re not actively making your money work for you right now, your net worth is eroding with every tick of the proverbial clock.
However, given the parlous state of the market at present, you might feel that you’ve already missed the boat when it comes to potential investment opportunities.
But nothing could be further from the truth. In fact, there are plenty of financial strategies available to you today, and, in this article, we’ll examine five of them that you can begin implementing right away.
1. The Defensive Approach
If it’s true that the biggest ships weather the greatest storms, then it stands to reason that the largest companies are those most perfectly poised to ride out the worst that the market has to throw at them.
Indeed, this belief is what’s behind the idea of defensive stocks.
In fact, investing in so-called defensive industries is perhaps the most widely-used strategy when the market is declining or experiencing particularly volatile conditions.
A defensive stock is simply any company that’s able to maintain a steady flow of earnings or sales regardless of what’s going on in the broader macroeconomic environment.
In general, well-established firms are considered to be the most defensive companies. These are often businesses involved in producing consumer staples – such as Unilever and Procter & Gamble (PG)
– or companies that make goods that are seen as “recession-resistant,” like tobacco manufacturers and some healthcare-related enterprises.
When it comes to investing in defensive stocks, investors don’t have to take an all-or-nothing approach. While some people might prefer to rotate the entirety of their holdings into defensive positions, it’s also possible to just diversify your exposure to these shares, allocating a certain percentage of your portfolio to companies that fit the bill.
Furthermore, defensive stocks can be a part of your year-round investment set-up too. Yes, they’re a great hedge when the market works against you, but they’re also a “sleep easy” fail-safe when things appear to be going in your favor as well.
2. Dividend Investing
When market volatility ramps up, investors have less confidence in their ability to judge the kind of price movements that their assets and securities are subject to. To mitigate this uncertainty, many turn to dividend stocks
as a way to ensure a reliable return on their given investments.
Although dividend distributions are still incumbent on businesses remaining healthy enough to cover their payout obligations, dividend-yielding investments are often seen as a good option in a downturn. This is especially true of “dividend aristocrats
,” companies with a proven record of consistent annual dividend payouts, and an unbroken commitment to raising their dividend payment every year.
In fact, when share prices are falling, dividend investors can take advantage of a strategy known as dollar-cost averaging. Dollar-cost averaging
usually refers to the practice of investing the same amount of money in a particular stock on a regular basis, regardless of what the actual price of a company’s shares happens to be at any one time.
However, with dividend investing, the falling share price of a security actually leads to a higher average yield with every share purchase you make. This means you are accumulating more dividend-paying stock reserves when prices are low, and less when prices are high.
Furthermore, if you combine this approach with a dividend reinvestment plan – in which you use your dividend cash to buy even more dividend stock – your overall gains will continue to grow and compound for many years to come.
3. Cyclical Industries
Although defensive stocks tend to perform better during a recession, they don’t normally deliver the kind of headline-grabbing capital appreciation that growth stocks
do during bull markets.
However, there are some companies whose cyclical nature doesn’t always align with the wider market, and can actually thrive when all other businesses are failing.
One recent example of this is the current situation with energy stocks. Energy companies usually have periods of high revenue generation – such as in the peak winter and summer months – with periods in-between where cash flows are less certain.
However, with the onset of the Russo-Ukrainian War, an acute energy crisis precipitated as oil and gas shortages became manifest. Energy stocks exploded in value, with the price of hydrocarbons rising in response to curtailed supply.
But this isn’t just the case with fossil fuels either. The price of other commodities and goods has been affected, including the cost of grain futures increasing massively from their pre-February 2022 level.
For the shrewd investor, geopolitical developments like this can make for interesting investment opportunities. Indeed, Warren Buffett doubled down on his energy bets lately, with the Oracle of Omaha upping his stake
in the multinational oil firm Chevron
, while also taking out new positions in Occidental Petroleum
4. Short Selling
Although it’s not for the faint-hearted, the option of short selling in a bear market is always an attractive proposition for those who don’t mind taking on the added risk.
In fact, short selling
can be a great way to hedge your current portfolio holds, especially with the use of less hazardous put and call options.
Indeed, it seems logical that when the market goes down, it’s time to start selling your stock short. And while there is some truth to this, for the average investor this might actually not be the case.
For example, when you go long in the market, your potential loss is limited to the amount of money you used to open your initial position. As such, a company can, at worst, only ever fall to zero dollars, and luckily can go no further.
However, with short selling, your possible loss is unlimited. A stock can ultimately keep rising in price forever, leaving you in a very unenviable position.
And if you think this scenario is unlikely to happen to you, you need only look at what unfolded with GameStop in early 2021
. In fact, as investors realize the power of crowd-sourced short squeezes, it’s likely that this will only become more common as time goes on.
5. The Contrarian Approach
It’s an overused cliché, but, when everyone else is selling, now’s the time to be buying.
In fact, that sentiment is very possibly true. High growth stocks have taken a mauling lately, but are all those businesses really dead and finished?
The answer is “probably not.” Indeed, technology firms such as SoFi and Upstart (NASDAQ:UPST)
have recently lost a massive chunk of their value, but their business theses remain the same.
For instance, SoFi’s growth
metrics are insane, with the company’s year-on-year revenue expanding at a rate of 60%.
Many investors kick themselves for not investing in Meta when it was sub-$20 a share, and they don’t want to make that same mistake again. However, zooming out and getting some long-range perspective on a stock is crucial, and, in today’s environment, might confer some critical investing wisdom.
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