With the recession on right now, many investors — and regular folks — are wondering what they should be doing right now. There is a struggle between the desire to engage in capital preservation and a desire to invest now for future growth. Capital preservation is a defensive investing strategy that helps you do your best to shore up against losses (cash investments are good examples of using a capital preservation strategy). You try to preserve your principal, rather than worry about actively growing your investments. Preparing for future growth, though, means that you do what you can to buy higher-yielding (though riskier) investments in the hopes that they will gain in larger amounts once the recession ends.
Dividend paying stocks and index funds
If you are interested in playing it a little bit safe while still positioning yourself for future growth in the stock market, you might consider dividend paying stocks and index funds. Some sort of stock investment is one of the things you should be buying into during a recession, and you can limit your risk buy looking into dividend paying stocks and index funds:
- Dividend paying stocks usually (but not always) come from companies that are reasonably well capitalized and in decent shape. Companies pay a portion of their profits to shareholders. You can further increase your advantage by choosing companies with DRIPs, allowing you to automatically invest the dividend earnings you receive. Because these stocks are often on more solid footing, they are likely to survive the recession. Although some could fail miserably and leave you with losses, the chances of that happening are smaller than with many other stocks.
- Index funds offer you the chance to buy shares in all the companies on an index. When an index does well overall, so does your portfolio. Index funds offer the potential for future growth, while providing a measure of stability and diversity — offering a certain degree of protection.
While capital preservation can be tempting in these uncertain times, you do not have to adopt an investing strategy that exclusively promotes capital preservation; mix it up (and increase your chances of better returns) with an eye to the future by using now as a good time to load up on dividend paying stocks and index funds.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
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