What is the most feared time for investors? Yes, it is a financial crisis. In simple words, the financial crisis is a collection of broad events in which the assets lose their value to a large extent. For instance, consider the case of the 2008 crisis, popularly quoted as the “Lehman Brothers crisis.” This was one of the most remembered financial crises so far. However, the financial crisis has occurred a lot in the past. The financial crisis is a derailing time for any economy as trade and the GDP (Gross Domestic Product) are impacted significantly.
Here are 5 amazing ways to prepare yourself for a financial crisis that may severely impact your finances.
A diversified portfolio of investments
A sensible investor will try to diversify their portfolio if they invest in riskier assets like crypto and stocks. It might be possible that they may get horrible returns at the time of recession as a recession impacts a country’s economy. All the companies and the asset nature associated with the country get into a down-trend phase, and there is a high chance that they may not get any positive returns. Studies have shown that it is necessary to have a diversified portfolio.
So, it is crucial to have a diversified portfolio of investments consisting of bonds, ETFs, mutual funds, stocks, and fixed deposits. Having a mixed portfolio has a huge advantage in these challenging times, as if you would have some investments in safer assets to make sure that all your funds are not staked or being replenished.
Stop timing the market
Nobody can predict the market’s next move. We all have certain kinds of stories or facts that may point to a particular movement in the market. But being accurate about the direction of the market is impossible. So, try not to time the market to save your investments or look for the perfect time to invest in any asset.
Instead, use a more straightforward technique to have a good holding on the asset you are looking for. The technique is called “average out.” It simply says not to make a lump sum investment in the market, try to break the total investment amount into parts, and then build your positions at sensible buying levels in the asset.
Smart investment tools like Finixio AI can help you build positions and holdings in your favorite investment instruments with ease and additional support. This is to make sure that you make investments sensibly and intelligently.
Have an emergency fund
Having a certain amount of money as an emergency fund by your side might be the biggest asset you own during a recession. Because this is the money, you would use in case you lose your job or go broke. So it is most important to plan your emergency fund for your expenses. Now comes a natural question: How should I design an emergency fund?
For your emergency fund, you should have a total that amounts to your 12 months of personal expenses. You can safeguard your expenses during a recession if things go haywire. As for the storage of this emergency fund, you should try breaking this amount down into 60% and 40% portions. 60% of the amount should go to the safest assets instruments, such as FDs, to ensure that it can be liquidated as soon as possible with the minimum or no risk factor involved, and 40% of the money you should have in liquidity at your place.
Re-evaluate your expenses
You may need more safeguards even if you have a systematic plan to safeguard your expenses or create a full-proof emergency fund. Complete shielding from the impacts of the financial crisis is almost impossible, but you can always prepare in advance. If you do not have control over your expenses, no matter if there is a recession, you will burn your finances anyway.
It is crucial to re-evaluate your expenses during the recession, as this will help you save some extra bucks in these hard circumstances.
Maintain a healthy psychology of investments
You may have often heard about the mental breakdown of people during a recession. This happens due to carelessness or not having control over your expenses. Sometimes it is because of a poor financial plan or bad investments that have incurred huge losses. Have a firm belief in yourself and generate positive habits that might replace the stress.
Recession is temporary, but your mental state is permanent. You may recover from the recession and heavy financial losses, but it might be possible that you may not return to a healthy mental state.
Recession is often and indeed a scary time when every finance instrument that we look up to in terms of growing our wealth turns red. Having structured planning and a firm belief in your plans can be a great way to tackle these difficult times. So make sure to consider all aspects of investments and build a concrete emergency fund.