Many investors have been nervous for months, worried that an AI bubble or a weakening labor market could lead to a recession. But now, amid heightened political uncertainty and conflicts abroad, fears about the stock market are rising.
To be clear, no one knows what the market will do in the short term. Even the best economists in the world cannot guarantee whether or not a market crash or recession will occur in the coming months.
Will AI create the world’s first billionaire? Our team just published a report on a little-known company called “Indispensable Monopoly” that provides critical technology that both Nvidia and Intel need. Continue “
However, no matter what happens with the market, there is one crucial step that all investors should take right now.
Where you choose to invest will have perhaps the biggest impact on your portfolio’s performance during a recession.
During periods of prosperity, it can sometimes be difficult to differentiate strong investments from weak ones, as even unstable stocks can skyrocket in price. This is especially true for companies in highly touted industries, as many investors are eager to buy into a sector without necessarily considering whether a stock is a viable long-term investment.
The health of the company can also change over time. A once-strong organization may experience a major change in leadership, for example, and the new people in charge begin making questionable business decisions. Or the industry landscape changes and a company that used to dominate the space is now struggling to keep up with its peers.
In all of these cases, weak companies are much more likely to struggle during difficult economic times. Recessions are the ultimate test of strength, and companies with shaky foundations could very well crash and burn if the market takes a turn for the worse.
The best way to protect your portfolio against a market crash or recession is to invest only in high-quality stocks with solid fundamentals.
While there are many factors to consider when choosing stocks, some of the most important signs of a strong company include:
-
Healthy finances: Examining a company’s financial statements can give you an idea of whether it is on solid footing. Metrics such as the price-to-earnings (P/E) ratio and the price-to-earnings-to-growth (PEG) ratio, for example, can help determine a company’s value and growth potential, while the debt-to-EBITDA ratio can measure its risk.
-
Competitive advantage: Some companies simply have more to offer than their competitors, whether it’s lower prices, superior customer service, or higher quality products. The stronger a company’s competitive advantage in its industry, the better its chances of surviving a recession.
-
Industry potential: As times change, sometimes entire industries struggle to remain relevant. Even if a company is fundamentally sound, it may still struggle to thrive if it is part of a dying industry.
-
Competent management team: The decisions of an executive team during crucial moments can make or break a company’s potential. If a company is strong but its leaders constantly make questionable decisions, those actions may not be as reliable during difficult economic times.