WHAT SHOULD YOU INVEST IN A RECESSION? Take advantage of the financial crisis and invest.
Many people wonder what to invest in in a recession to keep their profits healthy when there is a bad economic climate. Although investments in times of recession are complicated, by following the right advice, you can use the slump in your favor and thrive. In this article, you will find investments that work during a recession.
Should you invest during a recession?
Without taking into account the situation of the economy, it is always advisable to have some investment in progress. This could mean investing in your company, stocks, retirement funds, or a tangible asset. If you don’t have investments, your savings will generate a small interest rate of only 2% at most, while inflation devours your profits. Certainly, the volatility of the economy during a financial crisis is an issue to consider (although many have a risk appetite), but the truth is that investments always involve uncertainty.
Believe it or not, 14% of the time since World War II, there have been periods of recession in the United States.
The trick is to invest intelligently and make well-informed decisions.
What to invest in in a recession 5 ideas
We present some ideas for smart investments during a recession without recommending any specific company or asset.
It is worth noting that diversifying your investments is key, especially during economic recessions.
A defensive action tends to remain stable during uncertain economic periods or bearish markets. They are usually stocks in the commodity, health, or utility industries, which is why they have little volatility. Actions such as those of Coca-Cola (KO) or Johnson & Johnson (JNJ) are considered defensive actions since they have behaved relatively consistently during previous recessions. Therefore, investing in stocks like these is an excellent way to diversify your portfolio during a recession, although you should not expect to make huge profits from them. Defensive stocks are not growth stocks, but if the stock market is in free fall, acquiring them could help keep your portfolio stable.
Dividends on shares
These shares correspond to companies that have already seen most of their growth. Instead of generating growth through your capital, these companies pay dividends based on equity. These can be paid on a monthly, quarterly, or annual basis. In fact, dividends can pay between 0.01% and 5% per year.
For example, if you receive 1.5% in dividends and your property is worth $10,000, you will receive $150 per year in dividends, in addition to any potential growth. Often, investors choose to reinvest these dividends since they accumulate over time and will generate higher dividends in the future.
Stocks of value
The stock of value corresponds to companies that investors believe have a lower performance in the stock market, which means that they will be worth more than what the market currently reflects.
These differ from growth stocks, which correspond to companies believed to exceed market predictions.
Adding shares of value to your portfolio can be very useful, especially during a massive sale of shares. However, stock shares must be held for a longer period to receive benefits. If you have money to invest and are willing to keep it for at least five years, think about adding valuable shares to your portfolio.
Bonds are an excellent way to diversify and keep your investments safe. These are long-term, slow-construction investments with safe and stable returns. However, all investments involve risks. Anyway, buying bonds is excellent for a long-term low-yield investment with little or no volatility.
Reverse ETFs (exchange-traded funds) with short exposure are popular investments. ETFs are groups of stocks or bonds that come together and work similarly to a mutual fund. When the stock market is sinking, this will likely be an excellent way to diversify your portfolio, especially if you choose ETFs in the right sector.
Is it a good idea to invest in your inventory?
Sectors of good performance during recessions
There are several industries that are more resistant to the crisis than others. This does not mean that companies in these industries do not feel the effects of a recession but that, in general, they are more resistant to these economic stages. When looking for industries that can overcome a financial crisis, basic products and services must be taken into account. In general, the safest industries are the following:
- Health care
- Food and drink
- Essential items for the consumer
Of course, this list is a generalization. It has yet to be discovered how external circumstances could affect these industries, especially during a recession.
How to find stocks during a financial crisis
There are always ways to limit your risk when investing in stocks. This means investigating the industry and the company. Understanding the sector and how it has historically performed during recessions is essential.
Remember that the key word in this case is “could” since nothing is guaranteed in the stock market, even in the best economic times.
Something even more important is that you look for a company that has:
- A solid balance sheet
- Low level of debt
- Positive cash flow
A safe industry is essential for a safe investment, but when making a decision, it is important to take these other factors into account, which will require a more detailed examination of the company.
Rules for investing in a recession
Even when the economy goes through a financial crisis, consumers continue to spend money, which indicates that, in this situation, there is still money to be gained if you are making wise investments. The following are some general rules to follow:
Think carefully about what your goals are.
Define what you are looking to achieve as an investor. Do you want to keep your assets and save them from inflation to help secure your retirement? Do you want to build a secure dividend network? Of course, investors want to make money, which is always the primary goal. However, it is important to specifically define your timeline and what you want to get from your investments.
For example, someone who wants to invest in the short term (less than 5 years) may consider investing in stocks, stock dividends, and ETFs that are in reasonably safe industries. On the contrary, an investor who plans to invest for 20 years may consider the possibility of investing in a stock of value such as solar energy, which is expected to grow substantially in the coming decades.
Use only cash that doesn’t affect you.
We all need to have a backup plan during uncertain economic times. Investments in a recession should only come from disposable income and not from your safety net. Let’s say you have $60,000 in your savings account and you have a full-time job. Unfortunately, no career is truly recession-proof. In this case, it would be prudent to keep at least $10,000 in your savings account to prepare for the worst. As a general rule, it is not convenient for you to invest anything you may need in the next five years since it is impossible to predict how long the recession will last.
If you are putting your money into investments, learn as much as you can about them. Making an uninformed decision impulsively is a recipe for disaster, especially during a recession. Therefore, it is essential not to act hastily and to investigate well.
Don’t overdo it to diversify too much, but don’t fall short either. When it comes to diversifying, it is necessary to find the perfect point. Sticking to a single type of stock or industry is obviously risky, but so is dividing your money between too many stores. Try to stick to some key sectors and companies you understand or are willing to learn from.
Don’t go crazy by reviewing your investments and always stressing in case they go up or down. Instead, do a basic accounting job and follow up on the information to observe how your investments perform.
WHAT TYPES OF INVESTMENTS CAN YOU MAKE AS AN ENTREPRENEUR?
Investments to avoid during a recession
Below, we present some general guidelines that will help investors succeed in uncertain economic times.
During the crisis, it is not a good idea to invest in a new company, especially one whose cash flow is negative. Just a few years ago, Uber and Spotify were some of the most overrated stocks in the market. However, they had lower performance and are still not profitable.
Now, let’s imagine that Uber’s IPO was at this time. Today, fewer people take an Uber to work due to layoffs and remote work, and there is no guarantee of the company’s sustainability. Of course, we are using an example that certainly does not constitute a fair metric applicable to all growth actions. However, growth actions have historically shown poor performance during recessions.
Buying Kroger (KR) shares is fine since consumers will always need groceries. However, fewer people will buy from luxury stores such as Gucci or similar brands if they don’t have enough money in their pockets.
CFDs can lead to quick losses due to leverage.
Is it a good idea to invest in real estate?
During a recession, real estate markets can be unpredictable. It can be an excellent or terrible investment. Generally speaking, if you see the real estate market falling, it’s often time to buy. The market tends to show an upward trend over time, and real estate is a relatively stable investment with many opportunities for growth and profits.
The most successful investors agree that real estate is the best investment today. This makes sense when you think about it, given that they are tangible assets whose value is often appreciated.
- You have many options to choose from.
- You have total control over the investment.
- Everyone needs a place to live, regardless of the economic situation.
What other investment offers you this level of control for only 15% to 20% entry? You can choose between the following:
- Real Estate Investment Funds (REIT)
- Long-term rentals
- Short-term rentals
- Condominium development
And the list goes on. There are thousands of popular strategies, but none is more accessible than REITs. REITs are real estate companies that are listed on the stock exchange and pay at least 90% of their profits to shareholders. You receive dividends similar to those in shares. However, REIT dividends tend to be higher, often between 1% and 6%, and some of them reach up to 8%. Although the housing market is moving downward, you can even see growth.
On the other hand, if there is an imminent recession and a rising real estate market (as now), buying a property to rent or a house to remodel can be a disaster.
In this case, you can remember the importance of the location and concentrate at the right time. Diversifying your real estate investments at this time is much safer, but you still run a severe risk of the “real estate bubble” exploding. The safest solution is to wait for this to happen and then diversify. Many investors believe that the bubble will explode between now and 2024, so caution must be exercised.
You can just invest in your business.
Investing in your company during a recession can be a great idea because it can help you get around the storm and get ahead when the economy recovers. With this long-term investment, you can maintain or even increase your market share, which can place you in a strong position when the economic situation improves.
Similarly, it can give you a competitive advantage over other businesses that may be experiencing difficulties. Finally, investing in your business during a financial crisis can help you build a more solid and resilient business that is better equipped to overcome future economic recessions.
FREQUENTLY ASKED QUESTIONS
What is the safest investment during a recession?
Stocks and defensive bonds tend to be the safest investments during recessions since they are the least volatile. Investors also tend to buy defensive stocks en masse during periods of recession, which can inflate the price.
How do you earn money during a recession?
There are several ways to make money during a crisis. One way is to invest in companies that are doing well despite the economic situation. Another way is to start your own business. Finally, you can also look for opportunities to save money and invest it in assets that will increase in value over time.
What goes up during a recession?
Companies with solid balance sheets tend to perform better during recessions. For certain specific industries, utility companies and defensive actions tend to work better.
Will there be a recession in 2023?
Although there is no perfect measure or tool to predict recessions, it is very likely that the imminent recession will continue until 2023.
What are stocks with positive results in a recession?
We can only discuss historical data since no one can predict the future. However, the following actions have behaved admirably during previous recessions:
As can be seen, these companies are mainly found in the healthcare and basic consumer industries. Just keep in mind that past performance is not a guarantee of future performance.