Narasi.net — Steps to Protect a Trading Portfolio from Recession – The term trading book may be familiar to most market participants. In short, a trading portfolio is a collection of a number of investment assets owned by a trader or investor.
In general, these assets can be stocks, currency pairs, precious metals and more. The existence of this portfolio is often used by traders to monitor the condition of their assets. Not infrequently they use portfolio managers to feel more comfortable watching the movement of their asset groups.
There are a number of reasons why traders feel the need to keep an eye on a trading portfolio, from market sentiment that can change suddenly to external factors such as War. Often, these extreme changes have the potential to lead to a recession. This is one of the serious threats to the trading book.
In general, a recession can be defined as a decline in economic conditions that lasts for two consecutive quarters. One thing that can be used as a benchmark is the decline in gross domestic product (GDP).
Usually this affects manufacturing, retail sales and consumer income. A recession can also be characterized by a bearish phase of around 20% in the stock market. There are many factors that have the potential to trigger a recession, but usually these are caused by economic imbalances.
At the beginning of the recession, consumers will reduce consumption of services that are considered less essential. This resulted in a domino effect that had a negative impact on economic growth.
Many businesses will slow down or even stagnate as their revenue declines. Some companies may tighten payroll of employees for fear of future risks.
How Does a Recession Affect Trade?
When a recession occurs, usually traders or investors will panic. As a result, not a few have decided to withdraw their funds from the financial market. This results in lower prices for a number of assets. In addition, when economic conditions are uncertain, market participants decide not to invest in risky assets.
But the good news is that not all financial assets are negatively affected by the recession. Some sectors even strengthened quickly, because there are a number of markets that function as safe havens or places where market participants seek safe havens during the crisis. In order for funds to be more secure, there is nothing wrong with traders starting to build a trading portfolio that is safe from recession.
Protect your trading portfolio from recession
Risk has become an integral part of trading. However, business risks can be avoided by taking preventive measures. There are a number of steps you can take to build a recession-resistant trading portfolio. Here are some examples:
Diversification of Trading Assets
Diversification is a fairly common strategy for many traders to protect their assets. The essence of this method is not to spend trading funds on a single asset. Asset diversification, on the other hand, advises traders to buy a number of different assets to enrich their portfolio.
However, this does not mean that traders can arbitrarily choose the assets to use for diversification. The key to successful diversification is to have assets that have a negative correlation.
That is, the selected asset pair must have the opposite movement. So when the first asset weakens, the second usually moves higher. This is how traders can reduce the risk of loss on all assets. Examples of assets that have a negative correlation are the dollar and gold.
Consider Precious Metals
The precious metal is often considered one of the best assets to fight a recession. The reason for this is that precious metals have a different position than most other financial assets. Therefore, its value is usually safer even when global economic conditions are uncertain.
No wonder many traders add Precious Metals to their trading portfolio. Some types of precious metals that are often traded are gold and silver. Apart from being frequently used in jewelry, they also have an important role in industry.
Buy Defensive Stock
Before a recession, the price of some assets could plummet. But not all assets will experience the same, some others may survive or even become favourites. In general, sectors related to people’s basic needs will remain stable amidst economic uncertainty. This is what makes it worthwhile to add stocks of this sector to the trading book in an effort to protect assets from recession.
Health sector stocks can be another attractive option. This is because, despite the recession, people still need medicines, doctors and other medical products.
The US dollar can also be an attractive option to add to a trading portfolio. One of the reasons is that the US dollar is still the reserve currency in many countries and its value has become the benchmark for measuring the valuation of many assets in financial markets.
No wonder the US currency is one of the favorite safe haven assets among investors. In fact, lately the Yuan is also often equated with the dollar. However, judging from the long-term movement, the US dollar is still superior and more in demand.