How to make money in Recession

For investors, the initial shock is starting to wear off after stock markets plunged and fears of a recession spiked over the New Year. What remains is a feeling of nervousness, because subsequent events have done nothing to ease the economic uncertainty that sent stocks dropping in January and February.

The U.S. stock market and economy face a period of heightened uncertainty, with an economic recovery, slowdown, and deep recession all possible paths ahead. This situation of U.S Market is crucial affecting Indian Market. How should investors react to these troubling times? Here are five tips designed to ease nervousness and prepare you for whatever 2008 brings:

1. Don't get nervous by the uncertainty.

You don't know where the economy or stock market is going, but relax. No one else knows either.

Though almost everyone predicts a slowdown early in 2008, many Wall Street players, including Goldman Sachs, predict a full-blown recession, while Federal Reserve Chairman Ben Bernanke and others believe the U.S. will avoid that fate.

The bottom line: Trying to bet where the market will go in long term is a fool's task. It's better to focus on time-tested strategies, such as buying stocks which are having strong fundamentals and industry having strong bottom-line.

2. If you trade stocks, be careful how you do it.

The volatility in the stock market these days opens up a major trap for individual investors: Few amateurs can react to news as quickly as the professionals.

One strategy for supposedly dealing with this is limit orders, which allow investors to buy or sell when stocks hit a certain level. But a study recently showed the use of limit orders actually hurts investor returns. Why? When unexpected news breaks on a stock, investors with pre-placed limit orders get a bad deal, because they're often the only orders in the market willing to buy at high prices or sell at low prices that don't reflect the new information.

The bottom line: If you're not a well-informed investor, a volatile market can put you at a distinct disadvantage when you trade stocks.

3. Diversify, and go international.

Most investment advisers say Americans and many other country people including India don't invest enough of their stock portfolios overseas. Investors can get more reward for less risk in a portfolio spread among many different asset classes, including international and domestic stocks, bonds, cash, commodities, and alternative investment strategies.

One warning: Don't get too fancy. Sophisticated players lost big in the past year's sub prime financial crisis, and one reason is that they bought complex investments they didn't understand. If you can't explain an investment in a sentence or two, it might not be right for you.

4. Defensive moves might help you relax, but they'll probably hurt your returns.

Stock pickers advertise many strategies for riding out a recession. In theory, sectors including health care or defense will be relatively unfazed by a recession.

Large, international firms are popular these days because so much of their profits come from strong growth overseas.

Chasing these safer bets is a great idea if it helps you sleep better at night. But investors should understand that by reducing their risk, they may also be hurting their return over the long term. A defense stock might hold value in a poor economy

5. Make sure you have enough cash.

The stock market is a great place to make money over the long term. It has a great record of building fortunes after decades of saving and investing. If you're a long-term investor, you don't need to care where the market is right now. Rather, you should care about where stock prices will be five years, 10 years, or more into the future. Right?

The flip side of this advice, however, is that everyone needs a financial cushion for now, just in case. If a major expense hits during a bear market, you don't want to sell your stocks at a loss. That's why all financial advisers say you should keep a substantial amount of cash on hand, probably in money-market funds. How much depends on a variety of factors including the security of your job, your cost of living, and your appetite for risk.

The essential thing to remember is that the economy and market move in cycles, and a steady, sensible approach will carry your portfolio through good times and bad.