Navigating market volatility amid a potential recession

The global economy is just beginning to find its footing again after months of shutdown led many sectors to slow—or even cease—their operations. With high unemployment figures dominating financial headlines, and an unpredictable stock market, figuring out what’s on the horizon for the global economy is more challenging than ever before.

On a more personal level, determining how to navigate market volatility with your investments during a turbulent time is just as challenging. Deciding if buying during the downturn is the right move, or if playing it safe and transferring money to safer harbors, largely depends on personal factors.

Finding strategies to navigate market volatility will come down to your current market exposure and your willingness to buckle in for what could be a bumpy ride. Moving funds away (or towards) investments that are insulated or exposed to volatility comes down to finding your comfort zone in an unpredictable market.

Understanding your exposure to volatility

Every investment comes with risk. If you’ve ever put money into stocks, bonds, mutual funds, or other investment types, you’ve probably heard this phrase too many times to count. But what does it really mean?

In short, any time you exchange liquid assets—money, to be more precise—in exchange for an investment, there’s a possibility that you will make more money back than you put in at the beginning. But there’s also the possibility that your investment will decrease in value. Or, if you’re really unlucky, that your investment will be worth nothing. Although this is perhaps the first principle of Investing 101, it bears repeating.

These financial truisms take on increased significance during a turbulent market. The Dow Jones Industrial Average has fluctuated by hundreds of points in a single day since the beginning of the COVID-19 outbreak, and economists are far from consensus on what the future might look like for the global economy. What was once a sure thing during the bull run a few months ago has become much harder to predict in today’s investing landscape.

Understanding your appetite for risk is vital during a period of market volatility. Some asset classes—stocks, in particular—are more exposed to volatility than others, like mutual fund shares. Knowing your risk exposure means understanding your current investment allocation, and where volatility might make an impact on your portfolio.

Protecting your assets in a volatile market

Having direct exposure to the markets is a lot more appealing during a bull run than it is when markets are mixed. Most stock prices enjoy the benefits of positive growth on the broader stock market, which can increase your return as a result. But during more volatile periods, having the same level of exposure to the markets can be fraught with challenges.

Many investors might move their money away from direct investments in volatile sectors in exchange for other financial instruments that offer more security. In the process, they are leaving the potential for a greater return in favor of more predictable, smaller, returns. The risk-return tradeoff governs the logic at play here: less risky investments yield smaller returns, but riskier allocations may beat the market average. The former may provide a better chance of making any return during a volatile period, while the latter could incur a stronger risk of losing money.

Everyone’s approach to avoiding volatility assets amid a recession looks different. What’s right for your portfolio depends largely on your own goals—be it retirement, saving for a home, or stashing money away for educational purposes. Many of the underlying principles and techniques for lessening your market exposure are the same, however. Market volatility can spark opportunity for investors who have time to make up lost earnings. This is less the case for investors who want to safeguard what they’ve made off of their holdings.

Moving money away from stocks and into mutual funds, for example, can reduce direct exposure to stock fluctuations and market volatility: owning shares in a mutual fund or index fund gives you greater flexibility to avoid risk based on the fund’s stated strategy and asset allocations.

Pursuing a bond-heavy portfolio can be another tactic for avoiding volatility amid a potential recession. When markets are in flux, many investors will put money into treasury and municipal bonds that come with a certain degree of security that investors will see a return at the end of the bond’s term. The return on most bonds certainly isn’t on par with the potential earnings that come with stock ownership, but they’re also much less prone to volatility.

Avoiding volatility through alternative investments

Moving investments into lower-yield, lower-risk financial holdings isn’t the only way to buffer your portfolio against market volatility. In fact, there are several options out there that can help control risk without sacrificing major earning potential for your investments.

There is plenty to be said about moving money into alternative investments that are separate from the market and the volatility that comes with it. Pursuing alternative investments as part of a balanced, diversified portfolio can complement other asset allocations by moving some portion of your money away from the ups and downs of a market that teeters on the edge of a recession.

Alternative investments, particularly farmland investing, also offer a value proposition that can’t be found through other conservative investment options like mutual funds, exchange-traded funds, index funds, and bonds. Working with a firm like FarmTogether can open you to new opportunities to invest directly in farms across the country, each with a different internal rate of return, cash yield, and target hold. Combined, these different facets can give you a wide variety of solutions for finding the right match to cater to your financial desires.

Mitigating risk with alternative investments

Every investment comes with a certain amount of risk—in order to have skin in the game, you have to be willing to accept that not every opportunity pans out. That said, there are varying levels of risk that come with each investment type, and some incur less volatility than others. These options tend to take on a different shine during periods of uncertainty in the markets, or when a recession might be in the offing.

That doesn’t mean that every risk-averse investment has to be a low-yield play. Alternative investments, like those in farmland and agricultural technology, can offer opportunities that aren’t tied up in the market. Not being subject as directly to the swings of the market means that certain alternative investments can be protected somewhat from their ebbs and flows. Plus, they can still provide larger returns than the conservative financial products that Wall Street offers.