The global recession of 2008-2009 was a difficult time for investors. Despite the obvious risks, many people were drawn to stocks and other investments during this time. This demonstrated a lack of understanding of the risks of investing in uncertain times. While this kind of behaviour is understandable in a time of crisis, it proved to be disastrous for many investors. Many lost their entire investment in the weeks after the crash while others saw their portfolios shrink dramatically. By understanding how to prepare for the inevitable setbacks that accompany investing, you can better prepare yourself for success in the future.
Invest for the long term.
It is tempting to make a quick profit during a bull market and sell your position when things start to go wrong. Unfortunately, this is typically the worst thing you can do. The most successful investors hold on to their investments for the long term rather than focusing on short-term gains. This approach allows you to avoid the catastrophic losses that come with trying to time the market. It also ensures that you will have plenty of cash on hand when you need it most. With this approach, you are less likely to face financial disaster if another recession were to occur or if the recession gets worse.
Diversify your portfolio.
Many people think that the best way to limit risk is to invest in a small number of companies or asset classes. While this strategy has its advantages, it ignores the fact that financial markets are interconnected. This means that one company’s success can have a significant impact on another’s performance. As a result, it is almost impossible to eliminate risk through diversification alone. The best approach is to diversify your portfolio as much as possible while still maintaining a realistic investment strategy. This allows you to minimize risk and maximize your returns at the same time.
Be prepared for the unexpected.
An economic downturn can bring with it unexpected expenses that were not planned for. For a founder, these can include higher utility and rent costs, increased medical expenses due to reduced mobility, and the loss of their job if they are unable to work for an extended period. Taking steps to prepare for these unexpected expenses now will help protect your founders from devastating financial losses in the future. For example, purchasing a disability insurance policy will provide much-needed financial security if the founder becomes disabled and cannot work for an extended period.
Learn to pivot.
When a market downturn forces a company to make significant changes to their business strategy, it is important to be flexible and adjust as needed. Failure to do so can result in serious financial difficulties down the road. Following the advice of experts can be helpful, but decisions ultimately must be made by the founder based on his or her interpretation of the available data. By staying calm and making sound financial decisions in the face of adversity, founders can avoid being blindsided by sudden turns of events that would have otherwise proven disastrous for the business.
Learn to be lean.
In a recession, not every expense can be eliminated. In fact, some costs may increase during the early stages of a downturn to keep the business afloat. However, this does not mean that entrepreneurs should not attempt to save money wherever possible. By cutting costs where possible and making other necessary adjustments, founders can ensure that the company remains financially stable throughout the downturn and continues to perform at a high level when the market turns around.
Be Liquid.
It is always best to have a cash reserve to fall back on during a downturn. Having cash on hand will allow the founders to weather the storm without having to make tough choices that could negatively impact the business. Allowing the company to continue operating as usual until the market recovers is generally the best option for most businesses because it minimizes the impact on employees and customers. When the market does eventually recover, the founder will then be able to take advantage of the opportunities that are available at that time.
Be optimistic.
Recessions might seem to last forever, but the market will eventually take a turn for the better. The best strategy is to remain optimistic even during the darkest days of the downturn and be willing to take the steps that may be necessary to bring the company back to profitability when the market begins to recover. Founders who refuse to face the reality of the situation will almost certainly doom their company to failure in the long run. On the other hand, those who remain focused on the goal and do everything in their power to achieve it will ultimately be the ones who are able to make it through the recession and come out on the other side stronger than ever before.
Be a Mentor.
Investors have a lot to lose during a recession, but your focus should always be on the companies you invest in. If you have the experience necessary to provide valuable advice and insight to your founders, it will be to your advantage to do so. It may be tempting to sit back and watch things unfold as they happen, but this will not be the best course of action. Instead, you should make every effort to help your founders improve business processes and stay financially stable during periods of uncertainty. This can go a long way towards helping your company maintain its viability even during the worst times of a downturn in the market.
Introduce your founders to EquityMatch, where we provide solid financial advice and help founders understand key financial decisions throughout a start-up’s lifecycle. We help our founders identify their funding needs and map their ideal startup fundraising strategy. We can also assist with pre-seed and early-seed rounds. Finally, we can guide you through later-stage financing rounds and help you secure private or public investors. Contact us today!