HOW TO INVEST in a RECESSION? 3 INVESTMENT TIPS

2009 is going to be a bad year for the world economy. As the results of 2008 were declared, the intensity of the ongoing recession became clearer. Big multinational companies cut hundreds of thousands of jobs. Millions of jobs were cut by small and medium businesses. In all likelihood, the layoffs will continue all through this year, unemployment will keep rising - or at least certainly not fall, and perhaps 2009 will be the worst year most of us have ever seen.

Naturally, there is one question that bothers me and perhaps any other investor. How to invest in a recession? How far can one remain hopeful of a market rebound and keep losing money? Is there a good investing strategy to deal with an economic disaster like the current one? This post discusses 3 simple but effective investment tips to follow while making any investments during a recession.

Investment Tip 1: Keeping Lots of Cash 'ready to invest'

You have to adjust your investment style in such a way that you maintain substantial cash with you. Two concrete practical suggestions for achieving this are as follows:

1. Investing in small portions: Whenever you think there is a 'golden opportunity' to invest or a real bargain, invest only 1/3rd or maybe 1/4th the amount in that stock as you normally would. The reason is that recession usually gives you opportunities to buy your favorite stock at a even cheaper price than you think. You can then again make a small investment if prices go down. If they dont, the cash will definitely help you to find new bargains. Cash is King when the stock markets are making new bottoms.
2. Book profits regularly. Even if you are investing from long term viewpoint, it is a good investment strategy to keep booking profits, in case the stock you bought jumps by say 10% or 15% (you can fix your own number, but fix it).
   

Invetment Tip 2- Diversify your portfolio.

Diversification is a standard investment strategy used for risk reduction. In a recession it is indispensible. Never invest in just one or a few stocks. There is always a chance that any given particular company does worse than expected. It is good to have at least 10 different stocks if you are investing in Large cap companies, or 15-20 different stocks if you are investing in mid cap or small cap companies.

Investment Tip 3- Respect stop losses

Respecting stop losses becomes all the more important in a recession. The reason is that in a healthy economy, it is more likely that a stock rebounds. In a recession there have been examples of stock prices going to zero ! (e.g. Indymac Bank, Fannie Mae, Lehman Bros. etc.)
So before you buy a stock, even if it is from a long term viewpoint, first ask yourself the question: If things get bad, how much can this stock fall? Keep that worst price as your stop loss. If price falls below that - simply exit. Never wait for rebounds. If you are a swing trader or Intraday trader, you may keep stop loss in terms of percentage. I dont do intraday, but for swing trading, i keep a strict stop loss of 10%. This also encourages me to choose stocks more carefully.
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