Answer to Question #241683 in Economics for Zarah

Question

Suppose that an economy is in a recession, and assume that the IS curve is relatively flat. If you were to advice policymakers on which action to take to overcome the recession, what would be your recommendation? Show the results graphically with an explain.

Answer 1

Don't sell securities in a panic just because everyone is selling. Stick to your investment plan and only sell securities from heavily affected industries that are unlikely to recover quickly. In other words, sell those securities in the prospects of which you do not believe, but first, think about how to dispose of the money received from the sale.

For example, Warren Buffett sold shares in 8 companies owned by his Berkshire Hathaway fund in March - April 2020. These are 4 airlines, and oil and gas company, a bank, a financial and medical company.

Look at what is happening less often. If you are worried about news and falling stock prices, you should pay less attention to the situation. This way you will be less stressed and less likely to make bad decisions out of emotion.

Build up your investment. A stock market recession and fall is a good time to buy stocks if you are willing to take risks. So, you can buy securities that have fallen in price if you previously considered them overvalued and wanted to buy them cheaper. For example, the shares of Amazon, Apple, Tesla, X5 Retail Group, and Yandex fell by 30-50% in February-March 2020, but the stability and potential of these companies did not diminish.

Many stocks have fallen in price due to the pandemic. Is it worth investing free money or not yet?

You can also look at vaccine developers, medical device manufacturers, or high-tech companies. In the context of the coronavirus crisis, they have a better chance of earning money than oil workers or air carriers.

Diversify your portfolio ahead of time - before the recession. If the portfolio contains stocks and bonds of many companies from different industries and countries, then the long-term investor will survive the downturn with little or no losses.

And in order not to depend on the situation in individual companies, you can invest in cheaper ETFs and stock exchange-traded shares. It's easier than choosing individual stocks and allows you to diversify your portfolio with minimal effort.