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Survival Strategies for Stocks During A Recession (Part 2)

3 October 2007 - Features - Editor

Survival Strategies for Stocks During A Recession (Part 1)

As always, there is a catch! Experts study trends and linkages in the economy for 4 decades and over some 8 cycles of bullish and bearish phases, before discerning clear patterns (Ellis, 2005). Investors can shorten this duration for goods and services which they know intimately, but casual observations about new or unfamiliar economic sectors may be entirely misleading. This reinforces the widely-held notion that long term investments in stocks of businesses which one does not know, is always fraught with large risks. Such behavior is not appropriate when a possible recession lurks around the corner.

Why Stocks Are Your Best Bets

The links between stocks and a classic recession are not established beyond doubt, though the 2 phenomena are generally associated together (Farago, 2002). The important thing is that all stocks do not head in the same direction during a recessionary phase. A diversified portfolio, filled with stocks from the best managed organizations is therefore a reliable bulwark against uncertainty, and is liquid enough to provide flexibility at the same time.

Actual recession may be bargain time to invest afresh in stocks (Farago, 2002). Market sentiment tends to over-react to reports and rumors about short-term profit trends, and some stocks may fall well below their intrinsic values.

Though regular portfolio building steps help to protect investors from the effects of recessions, speculative habits may have the opposite effects (Farago, 2002). Put and call options, as well as buying on margins, may be sportive for the excessively wealthy, but they are likely to cause at least losses if not outright ruin when bearish sentiment begins to dawn.

Informed investing is the ultimate corollary to using stocks as protection against all kinds of uncertainties (Navarro, 2004). It is best to sit on cash rather than invest, as long as the identities of strong stocks in sectors with positive trends have not been established beyond reasonable doubt.

 


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