Find out “Planning is Crucial During Times of Economic Uncertainty” Investing or trading during times of economic uncertainty isn’t easy. Of course, one could argue there’s never an easy time to make financial moves. However, when inflation is high and economies are far from stable, things can be tougher than usual. Indeed, it’s times like these that planning is vital. Knowing which moves you’re going to make, when you’re going to make them and why is crucial.
There aren’t any right or wrong ways to invest or trade. Everything should be based on your circumstances and tolerances. Having said this, there are certain things you need to consider before you make any moves. This is where the benefits of having a financial strategy come into play. Based on this, here are some of the questions you need to ask yourself and, in turn, the resources you can use to plan your investments or trades during uncertain times:
What funds do you have available and what’s your goal?
The two most important questions you need to ask, and answer are: what can you afford to spend and how much can you realistically make? The latter is a tough one to answer with any certainty because financial markets are uncertain. However, you should be realistic with your goals. Saying you want to make 10X your investment within 12 months is a lofty goal. In reality, it’s best to be conservative.
It’s easy to know how much money you can afford to invest. The general rule is 50/30/20. 50% of your income (after taxes) should cover your living expenses, 30% can be for lifestyle choices and 20% should be for the future. The 20% can and probably should be split between savings and investments. You can choose the split you want, but at least some of your “future” fund should go into investments that have the potential to provide a positive return.
What level of risk do you want to have?
Risk is the chance that an investment’s performance will vary from an expected norm. For example, the S&P 500 has an average return of 10.13% per year, according to officialdta.org. In general, the index provides a return close to that average on an annual basis. Indeed, if you look back through the data, you can see this is true. Therefore, because the results fall in line with the expected norm, this can be classed as a fairly low-risk investment.
In contrast, Bitcoin is a high-risk investment. Why? Because the data shows that its returns vary massively on an annual basis. According to UpMyInterest, the annual returns for Bitcoin from 2018 to 2021 were:
- 2018 = -72.6%
- 2019 = 87.2%
- 2020 = 302.8%
- 2021 = 57.6%
That’s a lot of deviation, which tells us that Bitcoin is a high-risk investment. It’s important to note that high-risk investments aren’t necessarily bad. Conversely, low-risk investments aren’t always good. It depends on what you think is suitable for you, your mindset, and your bankroll.
What are the major events you should be looking out for?
You can’t get ahead of the curve if you don’t know what’s around the corner. An economic calendar is an essential tool in anyone’s arsenal. The right software will not only give you an overview of important economic events but allow you to sort them by date and importance.
For example, you can choose to view “high importance” events on this economic calendar and find out when things such as the Bank of Canada’s interest rate decision is being announced. As an investor or trader in times of economic uncertainty, this is an important event because it can affect trade, businesses, and many other aspects of modern life.
Once you know what economic events are on the horizon, you can do some research. For example, you might find out that insiders believe the Bank of Canada will cut interest rates. If you trust that information, you can make suitable investments/trades before an official announcement. Assuming you made the right call, you should be ahead of the curve and in a position to make a positive return.
Which securities perform best during times of economic uncertainty?
No investment is ever guaranteed to provide a positive return. However, there are certain financial securities that professionals see as more secure than others during uncertain times. For example, FarmTogether founder, Artem Milinchuk, wrote in Forbes that “precious metals” are “proven to be solid investments coming out of economic downturns”.
Government bonds are also seen as potentially safe investments because, by their very nature, they’re backed by governments. As such, they’re potentially less likely to be as volatile as equity-based securities such as stock.
Are you prepared for the swings?
The final question you need to answer yourself is, are you prepared for the financial swings that come with investing/trading? Your fortunes are always going to fluctuate in the financial markets. Sometimes things go the way you expect, sometimes they don’t. That’s a natural part of investing and trading. It’s also something you can’t change.
However, you should expect there to be more volatility during a financial crisis. This will, of course, depend on the securities you’re investing in/trading. The point here though is that rising inflation and interest rates can destabilize economies which, in turn, can cause more volatility within the financial markets. As long as you’re prepared for this, it’s not a problem. But if you go in thinking that you’ve got the perfect plan that can’t go wrong, you could be in for a shock.
Even the best-laid plans can falter when markets are volatile. Does this mean you shouldn’t invest/trade during tough economic times? No. As long as you go into it with your eyes open and a plan, there’s no reason you can’t capitalize on potentially profitable situations. Things might not go your way. In fact, there will be times when they won’t. But, as long as you have a plan and stick to it, you’ll give yourself the best chance of succeeding during a financial crisis.
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