Timing the market is usually a pretty bad idea. The market continues to hit new highs, which usually leads to even more money heading toward stocks. No one knows when the next bear market will start, nor do they know when it will hit its bottom. This means that it’s a pretty good idea to diversify across several different asset classes to minimize the pain that the inevitability of the next recession will bring to many. Here are some assets that are good ideas as the current bull market starts to get a bit long in the tooth.
Getting rid of all stocks is not a good idea, because the bull market could continue to run. Additionally, not all sectors will necessarily get hit during a bear market. Consumer staples, for example, tend to do better than other sectors in down markets. People still need to buy toilet paper and bleach. While it’s not a good idea to exit stocks altogether, it is probably a good idea to take some profits and look into other asset classes to mitigate the possibility of a crash.
Stashing all excess cash under a mattress or in a low-interest savings account is not really a good idea. Inflation will make this cash worthless in terms of buying power over time. This does not mean, however, that you should have no cash on hand. When the next recession hits, it’s likely that many people will lose their jobs. An emergency fund can provide a buffer between jobs. For those who do not lose their jobs, the cash could buy stocks at fire-sale prices. This cash can be held in a higher-interest savings account or a certificate of deposit to at least earn a little bit of interest in the interim.
Government bonds do not pay much in the way of interest at this point, but they are considered stable investments. Also, they pay out the interest that can provide a bit of income on a monthly basis. This interest can help offset some lost income that might be a consequence of the next recession.
Gold and Precious Metals
While gold might not be a productive asset like the stock of a company or a plot of farmland, it does tend to preserve capital in down markets. In fact, as people start to panic and sell off stocks at any price they can get, precious metals can actually appreciate. This has been the case in the last two major recessions. Those invested in gold did much better than those in stocks.
The value of real estate can fluctuate pretty extensively during an economic cycle. However, this does not mean that real estate is not worth holding as an investment. As long as real estate remains occupied, it can provide a nice cash flow. Sometimes this cash flow can return as much as 8 to 10 percent of the initial investment on an annualized basis.
As the market melts up, it is probably not a good idea to hold 100 percent of a portfolio in stocks. There are other asset classes that should provide a bit of cover when the inevitability of the next recession becomes a reality. The time for investors to prepare for this decline in stock prices is now. It’s possible to take some profits and diversify to preserve more capital over the long run.