If you have been investing wisely and paying attention to the news, you know that there are roughly a hundred thousand “economists” that have successfully predicted zero of the last fifty thousand recessions. If you have been investing wisely, and adhering to both position sizing and hedging, you should be ready when the next downturn actually arrives. When it does, you will be in the best position for a financial windfall.
It will be impossible to time the actual bottom of the recession, just as it was impossible to time when the 2009 Financial Collapse and subsequent recovery would happen. But there are several things we can do in the meantime, to make sure we are getting the most out of any bounce off the bottoms.
- Quarterly Rebalancing: This will help you maximize your returns when coming out of a deep recession. When you rebalance your portfolio every quarter, you are able to recalibrate your positions to an appropriate sizing. What this will do, will allow you to capture the upside potential in your long positions, as your hedges have gained value. Another way of looking at this is by cashing out your hedges in order to finance your longs.
- Watching for Signs of Recovery: Pullbacks are rife with “Dead Cat Bounces”, temporary recovery gains that are followed by deeper pullbacks during downturns. To avoid any traps, “Legging” into positions, which involves buying portions of positions before fully investing is a method of risk management which can benefit us hugely when imminent recovery is all but certain.
- Taking advantage of deeply discounted stocks: When stocks begin to recover from their pullback, new leaders in the market may emerge. In the same way that Facebook, Apple, Amazon, Google and Netflix have emerged as the market leaders since the Great Recession, the next recession will bring about new leaders. These will be the stocks upon which to build your portfolio. To give you an idea, since the recession, Apple has gained 2,386%. A $100,000 investment in 2009 would be worth $2.39MM by this month.
Remember, the trend is your friend when investing. In a bull market, do not attempt to strategize your portfolio for an imminent bear market. As we have seen with the current eleven year bull market, a trend can go on indefinitely. When there is a confirmation pattern is when we decide to take a full position one way or another.
Be reminded, as well, that you should be investing with a trailing stop of 10% for all positions within your portfolio. When these triggers are hit and you are stopped out of your position, it is time to re-evaluate that individual stock. If it is an outlier compared to the rest of your portfolio, it may be time to look for a new individual position. If all your positions are falling, nearing their stops, then a new trend may be forming to the downside. You will need to see how your hedges are performing to make a proper decision on how to proceed.