Despite inflation data moving at a sideways pace, following April’s weaker-than-expected consumer spending and mixed signals by the Federal Reserve on whether the central bank will bring interest rates down as early as September, market performance is beginning to flash warning signs for investors.
The U.S. central bank continues to gauge headline inflation as a key indicator of economic dexterity, holding firm on its ability to bring the economy in for a soft landing. However, continuous sideways movements, as experienced as recently as April are providing minimal indication of when the central bank is likely to start cutting rates and loosen its monetary policy.
Where are we now?
Over on the stock market, index sectors are beginning to buckle under the pressure of higher rates, slower consumer spending, and overall tension in the globalized economy. At the close of May, all eleven of the S&P 500 index sectors were seen trading in the red, as Treasury yields climbed higher and further gave a blow to stocks.
Both the real estate and utilities sectors, which are considered highly sensitive to the already shaky rate environment, were leading the strong decline, with both falling 1.1% and 1.2%, respectively.
Elsewhere the tech-heavy Nasdaq Composite and Dow Jones Industrial Average were riding out bumpy performance during the opening trading day of June.
Throughout June 3, the Nasdaq was tugging and pulling, as GameStop shares continued to rally, leaving the index to close off at 0.6% higher than what it started the day. The Dow Jones was down 0.3% or 100 points as the manufacturing sector lowered investors' appetite, and bond yields moved further into negative territory.
While the continuous upside performance isn’t a continuous offering, investors remain within the safety of their leverage as interest rates remain historically high and political uncertainty among key trading nations pushes the knife deeper into a recovering economy.
Protecting yourself against a potential S&P or stock market collapse is key, and in the current environment investors and fund managers are casting their nets closer as uncertainty looms on the horizon of the rocky waters.
Strategies to prepare for a potential collapse
Clean out house
Now is the time to start getting a thorough understanding of your portfolio. Start by looking at all your investments, evaluating the key criteria for each and whether they are meeting your long-term standards.
Many times investors lose track of where they may be standing with certain investments, and while it’s often common for investors and fund managers to pass through an experimental phase - dipping their toes into more risky investments - preparing for a collapse would mean clearing out stocks or investment options that can weigh you down should the market begin trending downward.
The purpose of this exercise is to consider the pros and cons of your investments and to trim some of the fat around the edges that don’t serve any purpose. While there might be a handful of investments that could stand out against a market collapse, it’s important to carefully consider the near-term potential, and how these stocks could bring favorable returns in a negative market.
Take bets on long-term investments
Instead of playing the short game, focus on spreading your holdings among long-term investments that provide better security and returns. Investing is all about being patient and nurturing your portfolio into something that will provide you with financial security for the foreseeable future.
Focus your efforts on stability and invest in holdings that have previously managed to ride out market downturns. Although it’s not easy to properly gauge which investments will manage similar performance in an already volatile market, it’s better to lock in long-term strategies, even if you’re uncertain of what the future holds.
In the interest of your portfolio, and hedging the possibility of a collapse, extend activity in your portfolio by focusing on key investments that can provide you with stability, and a close exit should you need to take it at any given time.
Diversification is key
There can be a benefit to having a diversified portfolio, and we tend to see this time and again when the market decides to fizzle out. Diversification brings better buoyancy for investors and ensures that all of their eggs aren’t in the same basket when the wheels begin to fall off and things are seen crashing down.
Countless market research has shown that broad diversification, although inappropriate holdings, partnered with long-term investing can help to improve portfolio reliability, investment outcomes, and capturing premiums that affect performance outcomes.
Carefully consider your options, and take note of past performance as an indication of how investments tend to perform during market turbulence. Diversification is a key ingredient that ensures valuable returns, but more importantly, allows access to wider corners of the market that may be less affected by a collapse.
Secure your online presence
As the market begins trending down, signaling a recession on the horizon, cybercriminals leverage the opportunity to redouble their efforts to take advantage of unsuspecting investors, fund managers, and online users.
In fact, during the 2008 financial crisis, the FBI reported a 22.3% increase in online-related crime. Like investors, cybercriminals are not immune to market turndowns, and a recession can further incentivize them to target their victims with a colorful plethora of scams.
Protect yourself online by using secure passwords and by updating your online login details. Opt for two-way authentication or biometric verification on mobile applications.
The use of non-cloud and cloud-based security features on Windows and Mac devices has surged in recent years as cybercrime now begins to chip away at the legitimacy of the finance industry.
Industry experts have revealed that communication encryptions, along with electronic signatures and two-factor or multi-factor authentication for approving transactions online are seeing widespread application to mitigate potential risk and unauthorized access.
These applications have already proven successful. In a 2021 Forbes article, experts found that there has been a 50% increase in organizations using electronic signatures, while 69% of individuals have said that they now prefer using e-signatures, and accompanying security measures to complete or authenticate online transactions.
Similarly, two-factor authentication provides investors and other financial experts with an additional layer of protection, enabling them to leverage more sophisticated digital encryption tools to authenticate their documents and communication channels.
Though the added security measures make for a more cumbersome experience, as many as 83% of organizations now require two-factor or multi-factor authentication, while over two-thirds require users to use biometrics for security purposes.
Online transactions have come under severe scrutiny in recent years as cyber criminals and digital thieves take a more aggressive approach to their tactics. With proper cybersecurity infrastructure, investors and financial professionals can efficiently navigate the dark, and seemingly tumultuous underbelly of the investment landscape.
Steer clear of “fear of missing out” investing
Keeping track of market trends, news, and insights is all part of the process, however, many investors are often misled by sensationalized news surrounding specific investments. This isn’t anything new, and the combination of social media and daily market insights has only further fueled a market driven by the fear of missing out on the next big investment opportunity.
Instead of jumping on the bandwagon, focus on the strategy you have, and how your investments will help you remain buoyant, even as the foundations are slowly showing signs of cracking.
The fear of missing out is a psychological mind game we tend to play on ourselves, especially as investors. We’re constantly looking for the next breakthrough opportunity, however, oftentimes we might already be sitting on something worthy of our time and money, but we’re just missing the bigger picture.
Take shelter from risky investments
During a time of extreme market volatility taking on more risky investments should be at the bottom of your priority list. While there tends to be some reward in taking a more risky stance on investing, being at the forefront of such risk could perhaps put you in a direct line of fire when the market comes crashing down.
Instead of holding too much weight in risky investments, try to minimize your appetite, and focus rather on dividend-paying options or leveraging tax-loss harvesting. Although these might not be the options that present you with the lucrative returns you’d expect to see, they might be more worth your time and money in the near term.
Breaking away from riskier investments can help you focus on broader portfolio diversification, enabling you to leverage options that have a proven track record of performance and possibly sell your losing positions to repurchase them at a later time.
Final Thoughts
In the current state of things, nothing is promised, and with market uncertainty continuing to stand at an all-time high it’s better to be prepared well in advance instead of waiting for the ball to drop.
While it’s not possible to time the next S&P collapse, it’s perhaps in your best interest to start casting your nets closer and tie up any loose ends you don’t want to have caught in the wind.
Prevention is better than cure, and with the stock market, having a safety net in place, even under positive conditions is the difference between a seasoned professional and a novice investor.
