An economic downturn usually makes people more aware of the importance of saving and spending their money wisely. Here are a few tips you can adopt to help you manage your money wisely during such periods.
Pay off your debt
The repayment of debt is the best investment you can ever make. A downturn in the economy means fewer job opportunities, wage cuts, and rising unemployment. In order to protect yourself, it is wise to repair your personal balance sheet. Reduce your spending and use the money you save to reduce personal debt first (credit cards, overdrafts, loans), then your mortgage. Build a cash cushion to help meet unexpected bills or to cover expenditure if your income falls.
Remember the basics of Investment
Don’t be swayed by media hype. Remember the basics of investment. Assess how much risk you want to bear, take into account how long you wish to invest for and apply an asset allocation appropriate to your risk profile and term of investment.
Choose low-cost funds that are adequately diversified in order to reduce risk. Be wary of products purporting to offer guaranteed returns, as they may not be what they seem, and always keep a reasonable cash reserve.
Diversify your portfolio
A diversified approach is always recommended. Broadly diversifying a portfolio minimises the risk of owning any single shareholding. Don’t be enticed into thinking you can easily get rich quick.
Rather than speculating on which funds are best to invest during challenging economic times, consumers should spread their risk by investing in different asset classes (equities, property, commodities, bonds and cash). This gives you the best chance of achieving your short, medium and long-term financial objectives.
Know your investment products
Remember that investment is as much about scepticism as it is about identifying opportunities. Never invest in anything that you do not understand.
Before investing, consider how you and when you will realise your investment in the future. Ask yourself why someone would be willing to pay more for your asset in the future compared with the cost at which you are investing.
Take advantage of tax breaks
Always take advantage of tax breaks. Don’t erode your returns by allowing taxation on your gains. Tax relief on pensions boosts funds immediately.
Understand all your expenses
Remember that investment charges are an expenditure item just like any other. In fact, they can be one of your biggest.
These principles apply equally in a recession or in a boom. Remember when investing or shifting your investments to consult a registered financial adviser.
The Trinidad and Tobago Securities and Exchange Commission is not an investment adviser nor is it a brokerage house. This article is intended solely to provide you with the information you need to make sound investment decisions and to ensure that you are familiar with and understand your rights and responsibilities as a consumer of financial services.