Tips for Trading in a Deflationary Environment

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By Dzhingarov

Inflation is the favourable climate for day trading and is the most common financial occurrence. However, there are times when demand for products is lower and the financial landscape transitions into deflation, which points to a reduction in prices across industries. Unfortunately, deflationary periods are unavoidable, but it can be heart-breaking to watch your healthy portfolio melt into nothing. Therefore, you need to be prepared and safeguard your portfolio to ride the storm, and we discuss these strategies below.

Exchange-Traded Funds

Exchange-traded funds (EFTs) are a great method of fortifying your portfolio during times of deflation. In particular, you should aim to invest in inverse EFT because they’re designed to mirror the falling market. However, there are some EFTs that boost profits through friction, but these can lead to heavy losses if the market rises. When you spot the market hitting deflation, look for platforms for your EFT investments.

Defensive Stocks

When the economy comes crashing down, there’s no surprise that investors go on the defensive. One way they do this is by investing in stocks for companies that sell products everyone always needs – items like toilet rolls, pharmaceuticals, and soaps. These defensive stocks will pay less but will see your portfolio survive through deflations. Alternatively, you can seek out dividend-paying stocks, including Starbucks.

Invest in Bonds

When stocks begin to decrease in value, bonds start to rise, which makes them a viable option for deflationary investing. So scalping becomes an option. You will receive interest on all your bonds, and this will help to mitigate the bite of stock losses. If you want a safe bet, then invest your money into high-grade corporate bonds and municipal tax-free bonds. Before investing in any bond, you should use a credit rating check service to make sure the strategy will work.

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Keep Hold of Cash

Cash assets are your best friend when deflationary periods hit because you will have more buying potential. During deflation periods, credit and money supplies decrease, which drives up the value of currencies. If you’ve ever tried to purchase anything on finance during deflation, you will know how difficult it becomes. Therefore, keeping your cash fund full is imperative to keep your portfolio afloat.

Pay Down Debt

The value of money declines during deflation, but the amount of debt stays the same, which means deflation makes it difficult for making repayments. Reducing your debt during deflation periods is a great way to survive. If you are unable to pay lump sums to reduce your debts, consider speaking to lenders to extend the payment period. Reducing debts is always a bonus but it becomes even more prudent during deflationary periods.

Deflationary periods are tough on everyone but are unavoidable in the financial world. Therefore, as an investor, you need to learn how to mitigate losses by fortifying your portfolio. You can do this by paying off debts, keeping cash assets, investing in defensive stocks, and adding exchange-traded funds to your portfolio. You will still see your portfolio decline, but you will make a speedier recovery.