Preparing for the next market downturn

In times like these it can be a challenge to identify when a market may turn down, often sharply. I’ve talked previously in this space about the need for diversification as a protective action for your portfolio against downturn in a highly connected global market. But sometimes that’s not enough.

Several years ago, we saw a sharp downturn in the global economy, followed by a housing crisis from the U.S. and Dubai, and subsequent banking and corporate governance failures all around the world. There’s no other way to put it - conditions were grim and many were left wondering what to do with their money.

Investors and financial advisors were cautioned to “wait out the storm” and keep their money on the sidelines, preparing for when the market would turn back toward a positive upswing. The thing is, it’s difficult to guess where the market is going, and even more so, when it will move. And, as we are taught, a reactive response will generally fall distant second to being proactive. Consequently, many individuals who identified opportunities during this time of restricted lending and regulatory hurdles were likely rewarded with the economic growth experienced in the years following the crash.

Like many in the industry I learned a lot during that period, and today am sharing four tips that you may consider to help you prepare for the next economic downturn:

1. Identify multiple exit strategies – Many lost money on investments that weren’t outstandingly great in 2008 because they followed suit and assumed they would make a profit because of rising market conditions only. You must always assume that there will be a market downturn with every investment you make, and account for this. We have learned this over time, and now look for multiple value generators in any investment we commit to. Ensuring we protect our capital in case of economic issues beyond our control – even if that means exiting an investment completely – is of utmost importance!

2. Hedging – Investors who invest all their capital in high return investments with no capital protection likely lost all monies in the last downturn. If they would have diversified their position and essentially hedged their investments, they would have at least protected their capital without monumental losses. Always protect your capital by hedging your investment and diversifying.

3. Acquire nerve, not fear – Just as you want to be prepared to exit if needed, you should also always be prepared to hold your investment. In the property market the investors that lose the most amount of money in a property crash are the ones who lose their nerve and sell their investments to ‘mitigate loss’. Usually this is conducted at the wrong time, and for the wrong reasons! Mostly, this occurs as the person cannot afford to hold or does not understand their investment properly.

A property crash is the time to buy! Shares and property are great things to acquire when purchased correctly in a downturn. If you are prepared to hold an investment during a downturn you will inevitably see your investment grow again, as is the nature of market cycles. Therefore, we use the principles above to make sure that this is possible.

4. Media – Remember that in the marketplace, if you are hearing it on the news you are too late. We can now use apps and the Internet to get alternative news and find information which is not yet widely available to base our market opinions on. I personally gather my information from different sources globally and look to use this data to make my decisions.

Inevitably, the market will turn sour for some period, and when it happens, those who wish to protect their assets must have a plan. Rather than waiting and executing the same passive plan as everybody else, potentially missing an opportunity to take advantage of these market scenarios, fully develop your strategy and follow through. Hopefully my experience serves as a model for creative thought and approach when it comes to investing. A proactive investor is a smart investor!