As a business student and young entrepreneur, I’ve dedicated a huge portion of my life to managing my personal finances: trying to get ahead and give myself a solid financial position to achieve my goals in the future.
Part of this preparation involves mastering early financial literacy and investment skills, and although I’ve managed to accumulate many effective investment strategies across my studies, the current state of the market is threatening to send my portfolio right back to square one.
I know there are countless other young investors in a similar situation: looking for an easy solution at a time of violent market instability. High schoolers and young adults looking to build an investment portfolio are no doubt frozen in fear right now — worried that any wrong moves could cost them the chance to fund their college tuition, or buy themselves a car, or give themselves financial independence at this critical stage in their life.
So, where does a young investor even start in a market as volatile as this? How can we set up our portfolios in preparation for a possible recession, and begin to set ourselves up for success in advance of another market shift?
The first step for any new investor beginning a portfolio amid an economic crisis is to prioritize diversification. “Market Timing,” or trying to guess when a recession will occur, is a flawed investment strategy that leaves too much up to chance, but through portfolio diversification we can create a viable and profitable strategy for building stability in uncertain times.
When starting your portfolio, you should make sure you’re spreading out your money across multiple industries, geographic locations, and companies of various sizes, and doing so in industries that are more resilient during times of economic downturn. These include necessary goods like utilities and household products – essentials that people will need regardless of the state of the economy – as well as United States healthcare and defense industries, which have historically performed well during past recessions.
Another essential step for a young investor navigating market instability is to prioritize “large-cap” stocks until the market stabilizes fully. This means putting your money behind stocks with the highest valuation in “market capitalization” — the total value of a company’s common shares owned by stockholders — and specifically aiming for companies with a cap number of $10 billion or more. These stocks will boost diversification while still giving your portfolio some essential stability, and create a more airtight path to recovery if their prices end up falling.
Market volatility also offers a riskier opportunity for long-term profit, particularly if you are in a place of financial stability and can afford to “buy the dip” in the market – within reason, of course. If you do choose to buy the dip, it’s important that you again focus only on diverse assets in resilient markets, or signal out large-cap stocks that have dropped and stabilized.
Finally, young investors need to establish a long-term plan for the portfolio once they’ve assembled a diverse collection of investments. Young investors are far enough away from retirement to remain calm through economic spirals and hold their investments for future profit, something that took six full years after the 2008 recession. If you do choose to capitalize on the dip in these stocks, make sure to perform comprehensive research and stay mindful of which stocks are poised to grow in a market recovery.
Even if the markets continue to drop in the future, young investors can still give themselves an incredible financial foundation by buying dips across resilient markets, diversifying their portfolio at a global level, and maintaining an aversion to panic.
