Despite opportunities to gain a lifetime’s worth of money and boost wealth in a recession, most people still fail to take advantage of red markets. Instead, they take advantage of them. This is probably due to the fact that they do exactly the opposite of the basic rules of investment. In today’s blog, we want to discuss why people lose out during a recession and how you can do the opposite to leverage red seasons like this to step ahead as an investor.
It’s common knowledge that to gain reasonably from your investment; you need to buy low and sell high. It looks simple, but many investors find it difficult to buy high and sell low and end up losing out while others are smiling at their portfolios. This derailment from the right action is usually a result of emotional investing.
The Investors’ Great Opportunity
When a recession hits, people are afraid and terrified of losing their money. So, they start to sell to prevent further loss. And as the market becomes green again and stock prices start to bounce back, they’re excited and start buying again. Most of these people are confirmed to lack a proper investment goal and strategy.
Intelligent investors don’t do that. Instead, they are more interested in red market periods to buy cheap and endure the short-term pain to enjoy the long-term gain. This tells us that a long-term investing mindset coupled with the right investment goal is paramount to success.
The truth is that periods of market fall throughout are very few compared to green seasons. If you can patiently wait when things are down, you will have more time to enjoy the market bubble.
To be a beneficiary of the big opportunity ahead of investors right now you have to execute your plan the right way. This can be active or passive, depending on the type of investor you are. If you love to study the market and invest in individual growth stocks actively, you will be running an active, long-term value investing plan, and if you don’t like the idea of observing the market movement now and then, you can invest a certain amount regularly in an index fund like S&P 500 to benefit from long term market performance. This is called dollar cost averaging. It’s interesting because even though you’re still investing the same amount, you are buying more assets when the prices are low.
Long-term value investing demands that you clearly understand basic investment principles and keep up with the market. You are not there to panic about the continuous fall. You’re there to spot opportunities that are reliable companies that you can buy at a very low price. The fall of these stocks is not because the company has lost its value. It’s just that more people are selling, and few are generally buying in the market, and that causes the price to fall.
Here Are Some Metrics You Need to Consider to Eliminate Investment Mistakes
Competitive Advantage of the Company
If you want to opt for the long-term growth investment plan, there are some metrics you need to consider to eliminate investment mistakes and ensure you select investments wisely that will profit from in the long run. So let’s get into it. The first metric to consider is the competitive advantage of the company.
When inflation and interest rates are high, the business has its share of issues. However, they can pass it on to the consumers by raising their prices. But there is a problem. Companies that struggle to compete in an industry might struggle with sales if they raise prices, especially when we consider that people need to hold onto more of their cash. However, companies that lead in their industry have the upper hand in this situation. They can raise prices slightly without facing a huge fall in sales records.
The next thing to look out for when selecting the company to invest in is debt level. With rising interest rates, companies with debt are at a greater disadvantage. In fact, they might go close to bankruptcy depending on the recession’s length and the debt level.
A company with zero or very low debt will hardly go out of business. They won’t have to deal with surging rates that might override the value of the business. So you can have assurance on the survivability and future performance of these companies compared to others that have a huge debt to settle.
Thriving Ability of the Business Model in Relation to the Economic Crisis and Beyond
The third factor you should observe is the thriving ability of the business model in relation to the economic crisis and beyond. E-commerce businesses, for example, experienced a boom during the COVID-19 lockdown. On the other hand, travel companies are on their knees begging for mercy because people can’t go on vacations.
Companies that have very low or zero debt should be considered by others when you want to buy. Generally, you should buy assets that are not losing their value to a recession but are only falling in price due to the spiral of increased supply and reduced demand. That way, you can sit back and wait for the economy to bounce back to enjoy the return of your intelligence investing.
If you love this blog, kindly give it a thumbs up and share it with others who are looking to improve their financial life. Remember also to signup to our newsletter so that you won’t miss out on any financial and lifestyle improvement strategies as we share them on this platform. Which do you prefer, passive or active investment strategies? We’d love to know your answer in the comment section.
Recommended books for further reading:
- Intelligent Investor: The Definitive Book on Value Investing – A Book of Practical Counsel
- The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits
- Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week
- The Barefoot Investor: The Only Money Guide You’ll Ever Need
- Investing QuickStart Guide: The Simplified Beginner’s Guide to Successfully Navigating the Stock Market, Growing Your Wealth & Creating a Secure Financial Future
If you are looking to open an investment account, follow the links below:
(‘68% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.)