At the end of 2018, the Nasdaq fell more than 11% and had its worst December since the Great Depression. If this downturn seems devastating, consider what the recession of 2008 looked like, when stocks fell 50%. Savings accounts depleted, and people’s financial futures looked bleak.
During these times, investors tend to pull as much money out of the market as possible. However, the ones who perform best don’t panic and remember that the economy is cyclical.
To determine what causes a recession, you have to consider several factors, including:
- Deflation cycle: When the value of goods decreases and companies have fewer people to aid production
- The asset bubble: When consumers buy too much of something, and a massive sell-off occurs
- Consumer confidence: If consumers worry about their economic futures, they tend to stop spending
- Manufacturing: If industry does not continue as usual, it can be a bad sign for the economy
Recessions happen, but a cyclical process follows where things slowly return to normal. Directly after is the recovery phase, where there are opportunities to buy stock and real estate at low prices. Next comes expansion, where GDP returns to normal levels, job numbers grow, and housing supply and demand are in balance.
While the market may look bad, it’s crucial to remember that things will return to usual. If you’re a real estate investor or own and rent properties, learn how to prepare for the cyclical economy without getting yourself down.
Plan for Market Volatility
Market volatility is entirely normal. When you see the economy falter, it’s not a sign to pull out of your investments. Instead, it’s a reassurance that the market is healthy, following the same cyclical pattern it always does.
When you know downturns are coming, you can devise a plan and prepare. However, you shouldn’t change your investment strategy based on the market. The only wrong thing you can do is panic when the economy looks bad and sell, as you’ll solidify your losses and eradicate the possibility of future gains. Instead, invest the money you don’t need and keep it in the market until it recovers.
Review Long-Term Trends
Crashes are worrisome, but it’s essential to understand short-term trends versus long-term realities. While the real estate market may drop, it will likely recover and grow much higher in value. If you buy when prices are low and keep a diversified portfolio, you’ll typically see returns over the next 20 years.
Currently, the rental market has seen a decline due to COVID-19. Search volumes for apartments are down between 10% and 35% in top cities. The housing market will also drop as the number of foreclosures rises, with some regions affected more than others. Few industries will see a profit in the next six months, and 75% of Americans worry the coronavirus will trigger another recession.
Nevertheless, experts are optimistic that the economy will stabilize. Remember that the U.S. seeing upticks in the number of renters in the population — a trend related to younger professionals’ lifestyle and career preferences. For real estate in particular, the need for housing is always there.
Limit Your Market Exposure
You may think, as an investor, that you must stay on top of trends and market news. However, the best performers are typically those who largely ignore shifts in the economy. The best move is to look over your holdings once per month, instead of checking in daily.
In one example, a fund invested $1,000 and merely tracked the market — they didn’t react to it. After 30 years, they garnered $23,000. However, an investor that takes that money, watches their portfolio and trades will only see $3,250 over the same period. One way to bolster your portfolio is to adopt a limited exposure approach.
The Nature of Real Estate and the Cyclical Economy
The real estate market, including rentals, is seeing a downturn due to recent events. However, those that want good overall performance from their investments will kick panic to the curb. Our economy is cyclical. While drops are unavoidable, resurgences will inevitably follow.
Holly Welles is the editor behind The Estate Update, where she shares real estate tips and ideas for home fixes.
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