If you watch or read any financial news, you are most likely aware of how events in one country seem to have an ever-increasing effect on other countries around the world.
Certain aspects of globalization can have positive benefits, but when threats of a financial crisis, war, global recession, trade imbalances, and more occur, people often talk about moving money to safer investments. Uncertainties can cause havoc in even the most well-informed investor’s portfolio.
Key Takeaways
- There is always some level of risk and uncertainty when investing, but it increases when wars, recessions, pandemics, and other adverse economic conditions occur.
- When hard times appear, many investors move their capital from equities to safer assets, such as precious metals, government bonds, and money-market instruments.
- Uncertainty impacts the economy on both the company and individual level, and on the global economy, such as global oil prices and the flight of capital into and out of countries.
- Be well-informed and adjust your investment strategy as events change, allowing you to invest wisely during uncertain times.
- Diversification is a key investment strategy that prevents significant losses if one area of your portfolio takes a serious hit.
The Impact of Uncertain Times on Investing
There is always an inherent level of uncertainty when investing. However, the threats of war or recession significantly increase uncertainty as companies can no longer accurately predict their future earnings.
As a result, institutional investors will reduce their holdings in stocks considered unsafe and move the funds to other asset classes like precious metals, government bonds, and money-market instruments. This sell-off, which occurs as large portfolios reposition themselves, can cause the stock market to depreciate in overall value.
In the markets, uncertainty is the inability to forecast future events and their effects. No one can predict the extent of a possible recession, when it will start or end, how much it will cost the economy and consumers, or which companies will survive unscathed.
Most companies typically predict sales and production trends, assuming market conditions remain the same as in the last several years, but increasing uncertainty levels can make these numbers significantly inaccurate.
Micro and Macro Risks
Uncertainty can affect the economy on both the micro and macro levels. At the micro level, uncertainty affects individual companies within an economy faced with the threat of war or recession, while uncertainty at the macro level tends to affect a country’s or the world’s economy more broadly.
Micro Risks
From a company-specific viewpoint (micro), uncertainty is a significant concern for those who produce consumer goods every day. For example, consumption may fall on the threat of a recession as individuals refrain from purchasing new cars, gadgets, and other non-essentials.
This uncertainty may force companies in certain sectors to lay off some employees to combat the impacts of lower sales, increasing unemployment, and reducing consumption. Consequently, the stock prices of companies that produce non-essential goods sometimes experience a sell-off when levels of uncertainty rise.
Macro Risks
On a macro level, uncertainty is magnified if the countries at war are major suppliers or consumers of goods. A good example is a country that supplies a large portion of the world’s oil. Should this country go to war, uncertainty regarding the level of the world’s oil reserves would grow. Because the demand for oil would be higher than normal and the supply uncertain, a separate country that depended on that country for oil imports would be required to tap into its reserves, possibly limiting oil consumption. As a result, the price of oil and all products that depend on it would increase.
Another macro-level event that affects companies and investors is the flight of capital and devaluation of exchange rates. When a country faces the threat of war or recession, its economy is considered uncertain.
Investors attempt to move their currency away from unstable sources to stable ones. For example, traders may avoid the currency of a country under the threat of war and trade currencies from countries without the threat instead. The average investor probably would not do this, but the large institutional investors and currency futures traders would—the foreign exchange market moves trillions of dollars daily. These actions translate into a devaluation of exchange rates.
Investing Strategies for Uncertain Times
When situations of heightened uncertainty arise, the best defense is to be as well-informed as possible and create your plan while the markets are good. Keep updated by following news that impacts markets and researching individual companies. Analyze which sectors have more to gain and lose in a crisis, and decide what you’ll do.
Investing in gold has been a popular strategy during hard economic times, primarily because gold has historically held an intrinsic value.
Times of heightened uncertainty can lead to great opportunities for investors who position themselves to take advantage of it. Some investors might decide to go on the offensive and search for companies that provide goods or services that will lead to great returns when things turn around. It is difficult to commit capital during uncertain times, but it can often reap huge rewards in the long run. Those who want to mitigate uncertainty and risk might be content leaving their money where it is or perhaps moving it to safer securities.
Diversification is always a key investing tactic—and not only in times of uncertainty. Having your investments spread across various assets, such as stocks, bonds, and precious metals, helps soften the blow if one area depreciates quickly.
Furthermore, investing in different regions, sectors, and industries also increases diversification. For example, if you had all of your investments in oil companies and oil prices took a dive because of an outbreak of war in the Middle East, you would face a significant risk of loss. Now, if you also had investments in the technology sector and renewable energy, your portfolio would not be impacted as much.
How Do I Invest in Uncertain Times?
It depends on your strategy and what your goals are. If you like to take advantage of dips in the economy and hope for gains in the future, you could invest in companies you believe will make it through. If you want to preserve as much as you can, you could take a defensive approach and reallocate to sectors that perform better during uncertain times.
How Much Is $1,000 a Month for 5 Years?
Depending on what you invest in, you could have at least more than $60,000 (unless the markets declined and your investments depreciated). If your investments earned you an average of 10% over that period, you’d have about $77,000.
How to Turn $100 in $1,000 Investing?
There are many ways to turn $100 into $1,000. Stocks, bonds, exchange-traded funds, mutual funds, and money market funds are only the tip of the iceberg.
The Bottom Line
Regardless of which strategy you decide to take (if any), you can’t go wrong over the long term by staying well-informed and preparing to take advantage of prices when they reverse. Create a strategy and plan, stay on top of the news, and adjust your portfolio accordingly to help you invest wisely during uncertain times.