Don't Fear the Bear: How to Profit during a Recession

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As fears of a recession loom large, many may be wary of investing during a recession.

However, there are several steps you can take to profit during a recession.

A recession is defined as two consecutive quarters of GDP decline and there have been 13 recessions since World War II.

Some common investment choices during a recession include:

- Core-sector stocks

- Stock funds

- Dividend stocks

- Real estate

- High-yield savings accounts

- Recession-resilient SMBs

So, no need to fear the bear market. Here's how to profit during a recession.

 

Understanding the Market

A recession can have a negative impact on all sorts of economic fronts: from job losses to home prices and housing starts to the stock market itself.

During the last four recessions, the S&P 500 declined an average of 8.8%, according to an article from Fidelity Investments.

Stocks declined nearly 40% during the financial crisis in 2008 before recovering 23% the next year. Stocks also fell 1.4% between February 2020 and April 2020.

However, they also generally recover faster than the economy. They usually hit their peak before the start of the recession but also hit their bottom before the official end of the recession.

 

Types of investments to consider during a recession.

 

Core sector stocks

Don't give up on equities altogether during a recession but instead focus on sectors that are unlikely to be affected by the downturn.

This can include buying core sector stocks in healthcare, utilities, and consumer goods. These are the sorts of things people must spend money on even if there is a recession.

Commodities, precious metals, timber, and commercial real estate also tend to be less volatile.

 

Stock funds

Another wise investment during a recession is to choose stock funds, like an ETF or mutual fund. These tend to be less volatile because they are made up of a diversity of individual stocks.

They also generally provide good annual returns over the long run.

 

Dividend stocks

Dividend stocks can be a savvy investment during a recession because they are generally less volatile than growth stocks.

They also provide a cash dividend, so you'll get a bit of income while waiting for markets to recover.

 

High-yield savings

Holding cash can be a smart move as well. You can spend it if you lose your job or if you want to purchase a house as home prices slow or even decline.

But you don't want the cash just sitting in your bank account doing nothing.

Put it in a high-yield savings account.

 

Real estate

Speaking of home prices, real estate can also be an attractive investment during a recession.

Prices generally go down, meaning it's an ideal time to jump into the market.

You'll also likely get a decent rate on your mortgage as central banks aim to spur growth by slashing interest rates.

 

Recession-resilient SMBs

Another possible way to profit during a recession is to buy a recession-resilient small- to medium-sized business using an SBA loan.

One of the best industries to do this in is home services like plumbing or HVAC.

 

Balancing Risk and Reward in a Diversified Portfolio

Having a diversified portfolio is a common investing technique to reduce your risk and chance of losses. By spreading your money out across different assets, you're insulated from a big loss in one area.

It doesn't guarantee against loss but is a key plank in long-term financial returns.

This can include owning stocks or mutual funds across a variety of industries. It also means putting your money in a variety of financial instruments, like stocks, real estate, saving bonds, etc.

 

Building a strong financial foundation

The importance of saving and reducing debt

You should only invest money that you don't need right now. You should also look at your debts and how much you're paying in interest.

It's often better to pay down debt now if your anticipated investment return is lower than your debt interest.

Invest after you've paid down those high-interest debts.

 

Building a solid emergency fund

You should always have enough money in the bank to cover at least three to six months' living expenses as an emergency fund. This can be used to keep you afloat if you lose your job or get injured and are unable to work.

If you don't have an emergency fund, now is not the time to invest. Only invest your money after you've saved enough for your emergency fund and don't dip into it to buy more investments.

 

Staying disciplined with spending and investing habits

A recession can be incredibly trying on your finances and your emotions.

You should stay disciplined in your habits from both a saving and Investing During a Recession perspective.

Keep socking away the money you normally would (as long as you can afford it) and don't invest money that you need for an emergency fund or money you'll need right away. You should also avoid making costly big-ticket purchases during a recession.

Keep your emotions in check as well. Avoid panic selling as stocks lose value. It's almost always better to ride out the volatility and wait for markets to recover.

 

Conclusion

Think about making smart investments during a recession with money that you don't need right now.

Try to stay disciplined both in terms of savings and investment. Don't buy any big-ticket items you absolutely don't need and don't panic selling equities as prices drop.

Think about investing in some recession-resilient options like core-sector or dividend stocks, real estate, or high-interest savings.

And always make sure you have an emergency fund that can provide you with at least three to six months' living expenses so you're able to stay afloat if you lose your job.

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