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.
