If there’s one thing the nightly news proves, it’s that bad things are bound to happen. Financial crisis, natural disasters, political scandals and corporate malfeasance are, regrettably, a part of life. In today’s globalized economy, bad news halfway around the world can cause rippling impacts around the world.
As a result, many investors hit the panic button every time a newsflash shows up on the television screen. But for smart investors, bad news isn’t necessarily bad. With a little research and a keen eye, tragic events can also represent opportunity. Smart investors can use several strategies to maximize returns in tough circumstances.
Consider Countercyclical Assets
The first strategy to invest in countercyclical assets. A countercyclical asset is a holding that tends to perform better in a down economy. It sounds counter-intuitive, but many companies and industries actually expand when the rest of the economy suffers. A good example is the education sector. As companies go out of business and lay off workers, many people look for opportunities to expand their skill sets.
That’s one reason that many for-profit education companies saw their stock prices increase during the most recent recession. Precious metals like gold and silver can behave in the same way, since many investors flock to gold when they are concerned about currency instability. With a solid understanding of business cycles, investors can earn profits even in terrible economic circumstances.
Predict Demand After Natural Disasters
A second strategy, especially useful in the wake of natural disasters, is to ask what people are likely to need in the near future. In the aftermath of hurricanes, for example, regional demand for construction supplies tends to rise dramatically. People need to rebuild their homes, stores and offices. As insurance companies pay out claims, consumers buy concrete, lumber, and labor.
Natural disasters also encourage consumers in other areas to improve their own disaster preparedness. For example, when a major tornado struck Joplin, Missouri, consumers in Oklahoma started buying storm shelters. A smart investor can take advantage of the jump in demand for these goods and services.
Look Towards Cheaper, Quality Alternatives After Bad Economic News
A third strategy for investing after bad news is to look for companies offering cheaper alternatives to common products. When times are tough, people often try to cut costs in any way they can. Often, that means opting for a slightly inferior product than they might have otherwise purchased. Consumer electronics and automobile sales provide evidence for this idea. Luxury cars often lose market share in recessions, while cheap and reliable brands pick up steam.
Consumers often cannot delay buying a new car when their old one breaks down, but they can opt to buy a cheaper car. Clever investors can anticipate these changing consumer trends and reap the rewards.
Many investors think that a bad economy is a bad economy, and tend to pull out of the market altogether. The problem with that strategy is that it exposes investors to inflation risks. Savings accounts are safe, but the interest rates on even the most generous accounts can’t keep up with rising prices. A better investment strategy is to find the hidden opportunities created by bad news.