During a recession, there is almost always a large drop in stock prices, mutual funds, and interest rates, so saving at banks is less valuable than in good economic times.
Given that the world will sooner or later return to the economic crisis, the question is how to invest during a recession? If you wonder what are good investments during a recession, the following list should help you with this question.
Currencies
Several currencies have the status of haven in uncertain times, such as the US dollar, the Swiss franc, and the Japanese yen. Due to the increase in demand at the beginning of each recession or political crisis, the value of these currencies increases significantly, making it possible to profit.
The US dollar is strengthened by the attitude of the vast majority of investors in the financial markets that the size of the economy, political and military power will make it the easiest way for the US to get out of the crisis.
The Swiss franc strengthens due to the stability of the Swiss economy and confidence in the Swiss banking system, while the Japanese yen strengthens due to the export-oriented economy.
Real Estate
Citizens who want to invest their money safely and in the long term, which is very risky in times of crisis, are increasingly opting to buy real estate. One of the most common answers to the question of where to invest money is “Buy an apartment and rent it!”. It may indeed be a lucrative investment in the long run, but there are other aspects of real estate investing that need to be taken into account, and there are several. Real estate is, as a rule, illiquid assets. If you need money urgently, the question is whether you will be able to sell your apartment or house at fair value in less than a few months.
Precious Metals
During the recession, trust in banks is usually low, and occasionally even bankruptcy of part of the banks occurs, with people losing some or all of their savings. Therefore, investors and people prefer to transfer their capital to precious metals such as gold and silver, which have proven to be good investments during a recession. Due to high demand and limited supply, the value of precious metals rises sharply at the beginning of the crisis, with the potential for profit.
Stocks
Investing in stocks in the food, tobacco, utilities, or telecommunications sectors is a good investment during a recession. As it is predicted that after the financial crisis and the calm of the market, an economic recession may occur, the question is which stocks to invest during this period.
Most investors then tend to invest in defensive or non-cyclical stocks. Defensive stocks perform better than the market during a slowing economy, offering high dividend yields in a period of low-interest rates. The answer lies in the fact that defensive stocks maintain a fair level of net profit, regardless of the rise or fall of the economy, because they produce or distribute products and services that each consumer needs: food, electricity, water, gas, etc.
On the other hand, the revenues of companies whose shares are cyclical depend on whether the economy is in a good state- it falls when the economy is in a bad state.
Bonds
A bond is a financial instrument, that is, debt security, by which the issuer (the debtor) acknowledges that it has a financial obligation to the creditor (the buyer). The debtor is later obligated to settle his obligation by repaying the borrowed amount, with interest or otherwise, following the initial conditions.
Index Funds
Even the largest companies can fail, with investors losing their entire stake in its shares. For example, Bear Stearns Bank of America was worth $ 20 billion at one point and went bankrupt in 2008. The stock market index consists of a large number of stocks of different companies, and every few months, the “worst” is thrown out of it.
Several new types of stocks are added, which increase the stock market turnover or market capitalization. Therefore, the index practically cannot drop to zero. The shares of all successful companies will eventually end up in the index and contribute to its growth. This theory is proven in practice.
What you should never do when wondering how to protect your investments during a recession is to make predictions because it is very difficult. Diversification of your investment is the best option in this case. At a time of stock market turbulence, such as the current situation, there is a decline in the value of companies’ shares.
For more conservative investors, this is a sign that investments need to be diverted into bonds and thus generate a smaller but more stable return. For investors who are willing to take the risk, times like these are great to invest in stocks, as the stock price is lower.
What Happens to Stocks During a Recession?
The value of stocks drops significantly in a recession. This could mean 10, 20, or even 50 percent! Knowing that stocks go down during a recession, the question becomes, “what are good stocks to own in a recession?”
First, remember that you can’t predict when a Recession is going to happen. Even the smartest analysts that do this full time can get it wrong. Even if we can’t accurately predict a recession, we do know one will come eventually. It’s still not a good idea to try to time the market. As Peter Lynch says, “it’s not about timing the market, it’s about time IN the market”.
If we can’t time the market then what can we do? Well, we can invest in things that have a fighting chance during a recession.
What Are Some Good Stocks to Invest in During a Recession?
A lot of people that pay real close attention to the financial world are predicting a recession or even a depression (crazy!) may come in the next 12-24 months. There is no real way to guarantee your investment will be safe.
There will always be risks and the truth is, no matter how well you prepare, a recession is a recession. More then likely you are going to lose value in your portfolio. However, the good news is there are ways to mitigate those losses, and in the long term, come out ahead. After all, investing should be a long term strategy and you should expect some years to lose value while other years you gain value.
That is the nature of the stock market. When choosing what stocks to buy during a recession investors need to be cautious, but keep a keen eye on the market, the plan should be to pick up traditionally high-value assets at a discounted price.
Buying stocks during a recession can be a risky business as the stocks that are performing the worst are usually highly leveraged, speculative, and cyclical. If you invest in a company that falls into any of these categories, you run the risk of them going bankrupt.
This does not mean that you should do nothing. You need to choose high-quality stocks to invest in during a recession, pick companies that have low debt, steady cash flow, and sound balance sheets. Look for companies that historically are recession-proof or perform well in difficult economic circumstances.
Savvy investors are aware of what happens to stocks during a recession and bide their time to follow these key rules:
Avoid speculative investment opportunities, as these companies pose the highest risk of performing poorly.
Choose to invest in companies with low debt, strong balance sheets, and excellent cash flow. If you are looking for stocks to own in a recession, choose stocks that historically perform well, and have shown their price appreciates despite the rest of the market underperforming.
Stocks to own in a recession
Many investors are tempted to ride out the recession with little or no exposure. These investors will inevitably find themselves losing out on significant opportunities. The first stocks you should be looking at are the ones with huge balance sheets or proven business models. You also want stocks that pay dividends. These include:
- Utilities
- Consumer staples
- Defense stocks
- Grocery stores
- Discount store
- Funeral services
- Alcohol manufacturers
What stocks go down during a recession?
Understanding the stocks to avoid during a recession is just as important as knowing the ones to buy. While predicting exactly which stocks to avoid, some types set some alarm bells ringing. Usually, they are industries that are traditionally attached to consumer confidence such as:
- Fashion
- Furniture stocks
- Car companies
- Travel companies and airlines
- Restaurant chains
- Property companies
Investing in Bonds During a Recession
can be a high-risk high reward tactic. There are some simple strategies you can use to give yourself an edge, but beware there are always going to be risks. I will outline what bonds are, why they can be so risky, and what steps you can take to make them a safer investment.
What are bonds?
A bond is a form of investment. They are typically a fixed bond with a set interest rate that doesn’t change. They mature over time, eventually providing you with a big return on investment.
If you imagine you bought a $25 bond, the government or a company will give you a slip of paper (often digitally now) that is a bond for $50. Your bond will mature in 25 years, gaining $1 in value a year. If you sell the bond right away, it is worth $25, if you wait 8 years it would be worth $33, if you wait until it matures it will, of course, be worth the full $50.
Why are they so risky?
The reason bonds are so risky, especially if it’s from a private company, is that if the company goes under your bond is worthless. Sometimes the value of bonds is directly tied to the value of a company.
Since recessions are so volatile for the market, this could leave you with worthless bonds. Investing in government bonds is safer, as the government isn’t likely to go bankrupt. But they may put a hold on people cashing their bonds until the economy recovers. You may put money into bonds and not be able to get it back out for a long time.
Tips for investing:
An economy in a recession can work out in your favor if you have money to spare. It is still a risk, as any investment is, but you could end up with a huge payoff. Since bonds are so volatile if you buy bonds when they are very cheap when the market recovers you could turn a huge profit. Of course, the company could still go bankrupt and you would lose your investment, but your odds are often good. Pick bonds that are statistically well-performing and you will likely come out the other side of the recession just fine.
You can also sell these bonds to other people once the market starts to recover slightly, even if it is just a blip, to other investors. You make a small short term profit and are rid of the volatile bonds.
Real Estate Investing in a Recession
A recession refers to a significant decline in economic activity which is a concern for investors. It can lead to foreclosures, layoffs, and other economic hardships. During this time, people look for low-cost housing. This brings us to the question, is real estate a good investment during a recession? Yes, as long as you keep an eye on the bigger picture. When a recession hits, the home values drop so you can score a deal on an investment property.
What exactly to do?
If you rent the property to a tenant, you’ll get a steady income as you ride out the recession. Also, real estate is less sensitive to volatility thus a reliable choice during a recession. This can also be a good hedge against inflation. The truth is people need places to live and work even in times of recession. If you’re targeting a city with a high occupancy rate, you increase upside potential regardless of the economic conditions. It’s worth mentioning that most companies rent their office space. Therefore, even if they lay off most of their employees, they will still need a space to operate.
Investing in REITs During a Recession
Unlike tangible property which is expensive to buy, REITs can be traded on apps. And because they come in single shares, investors can diversify their REITs holdings.
What’s more, real estate investment trusts allow you to invest in properties without direct ownership. When you invest in REITs, your portfolio may consist of hotels, office buildings, warehouses, resorts, and mortgages. Diversifying your assets is better than investing in one commercial building that may tumble.
Make sure you look for the best real estate investments during a recession. Since not all classes of real estate do well, you should invest in a commercial multi-family property. It will help you stay on top of the game despite the downturns in the large economy.
While there is no such thing as a recession-proof investment, real estate investment trusts come close. They can withstand most of the forces when the markets are weak.
Investing in Index Funds During a Recession
Index funds might be the easiest and smartest investment you’ll ever make. But, should you consider investing in index funds during a recession? Yes. They have very low fees and give higher returns than most actively managed funds. And because index funds tend to be diversified, you can be sure the prices won’t fall to zero. Also, index funds don’t beat the market but try to be the market.
Why should you buy index funds during a recession?
Buying index funds during a recession is a smart idea. They are an indirect way to buy the whole market. If you’re a long-term investor, you don’t have to worry about how steep the market is.
The truth is that index funds will increase in value in the long-run. While you may not outperform the market when you select individual assets, you should expect solid returns with time. To achieve this, you must choose an index fund that shows consistent growth over time.
Another advantage of investing in index funds is that they are available across different asset classes. What does this mean to an investor? You can buy funds that focus on companies with large or small capital values. The funds may be less diversified but they are better than buying stocks from a handful of companies.
Which funds to choose?
A good example of a well-performing fund during a recession is the S&P 500. It’s used as a barometer of equity markets in the US. Over the years, this index fund has been posting an annual return of 10%. Other index funds that perform well include NASDAQ, Russell 2000 index, The Dow Jones, and MSCI EAFE index.
Index funds help you diversify your portfolio and are a great alternative to conservative investors. While individual stocks may continue to fall during the recession, the index fund tends to rise over time. You’ll not get bull returns in a bear market but you won’t lose your money as the market sinks.
As long as you pick on the best-performing companies, you’ll meet your investment objects in a recession.
Investing in Gold During a Recession
During a recession finding a way to safely invest your money can be tricky. There is often no way of telling how a particular stock or investment fund will perform given the economic climate. This can lead to people looking for commodities to invest in, one of those is gold.
Gold is one of the most valuable materials on earth, it has plenty of uses for both electronic technology and jewelry/art. It has been seen as a valuable commodity since the earliest instances of currency and that likely won’t change. But is gold a safe bet in a recession?
Yes, gold is historically very safe. The reason being that gold steadily rises in value no matter the economic climate, gold is always needed recession or no. Gold is needed for building complex computer components, like parts of phones, not just jewelry.
When the economy is struggling people stop buying jewelry, but people cannot stop buying phones and computers. They need them for work. Furthermore, gold isn’t tied to a stock market the same way most forms of investment are.
Even if the value of gold does dip slightly during a recession, it will eventually regain its value when the economy turns around. You won’t lose your money the same way you could with stocks, because you will still always have the gold.
Even historically, before gold was needed for computers, it was generally a safe investment during a recession. Because gold is a tangible asset that you can hold onto, it is much easier to keep track of. People feel safer if the investment is something that they can physically hold onto.
You could always invest in property, but the mortgage rate won’t dip when occupancy rates do, meaning you may find yourself with properties that you can’t afford to pay for. The bank will foreclose on you, and your money is gone. When people buy gold nowadays it is typically kept by the bank or a firm, but at any time you could go and collect it.
During a recession, people withdraw their gold far more frequently. So yes, gold is generally a very safe investment, even during a recession.
In Conclusion
There are many things to invest in. When a recession comes, that is the hardest time to decide where to put your money. The truth is, whatever you invest in during these times, you are likely to lose money. However, if you pick good investments during a recession when the economy recovers (and it will) you will be in a great financial situation.
If you’re wondering how to invest during a recession the answer is, in my opinion, very simple. and its the same thing you should always be doing.
Stay diversified. This is how to protect your investments during a recession. Put a bit of money into everything. With fractional shares, and many brokers to choose from, you could spread even a single dollar across many investments. These investments include:
- Stocks
- Bonds
- Real Estate (REITS)
- Index Funds/ETFs
- Gold
If you do this you will be fine. The important part is to not get scared and sell. You don’t lose money until you sell. If your investment value goes down it’s important you take the time to understand why they are good investments and believe they won’t go bankrupt.
The people that sold their houses in the great 2008 recession gave their wealth away to the people that bought houses in the great 2008 recession. Remember that.