Surviving a financial crisis while maintaining your wealth can appear to be a daunting task. However, the solution is not as straightforward as “sell everything and wait until it’s over.” In reality, that’s rarely the best advice. Some assets perform well during crises, and determining when a crisis has actually started or concluded can be challenging. The secret to coming out on top is a combination of diversification and timing.
There are historical examples of individuals who made the correct decisions at the right time and profited during recessions. For instance, Joseph P. Kennedy shorted stocks just before the 1929 crash, and Hugo Stinnes borrowed in Reichsmarks to buy hard assets during the Weimar hyperinflation. These men recognized opportunities and seized them, emerging as some of the wealthiest individuals of their era.
The saying “timing is everything” may be overused, but it holds true. Your strategy for investing during a recession must consider the timing of the recession before, during, and after it occurs. There are three distinct stages, each with its own profit dynamics.
Stage 1 is the time before the recession starts. At this point, you should decrease your equity exposure, increase your cash holdings, and enhance your exposures to U.S. Treasury notes and gold. Predicting a recession is difficult, but certain indicators, like inverted yield curves and decreased commercial lending, can provide hints. Patience is essential during this phase.
Stage 2 is when the recession actually occurs. If you made the right decisions in Stage 1, you should be in a good position. This is when careful stock selection becomes important. Opt for sectors that perform well even in a recessionary environment, such as defense stocks, the oil and natural gas industry, agriculture, and mining.
Stage 3 is the trough of the recession, just as stocks are about to start a new bull market. This is when you should use your cash reserves to find bargains in sectors that have been hit hard. At this stage, reduce your U.S. Treasury securities, as interest rates tend to increase in a growing economy, leading to losses in bond prices.
Recessions can provide opportunities for those who are prepared. The key is to remain diversified and agile. Stage 1 is dominated by cash and Treasuries, Stage 2 by selective stock picking, and Stage 3 by broader stock picking. Gold plays a role in all three stages. By understanding the stages of a recession and implementing different strategies in each stage, investors can not only weather a financial crisis but potentially profit from it.
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