Investing During The Recession: Risks & Advantages
Increased uncertainty and volatility in financial markets might result from a global crisis or economic collapse. Wild swings can be frightening, but they can generate opportunities. Is such tension a reason to remain away and avoid the risks? Should you go in and try to reap the benefits? The solution may not be easy. And past patterns may not give a clear direction or even hints about what will happen in the future.
Six recessions hit the US economy between 1973 and 2009. Several lasted less than a year, while others lasted a year or more. Perhaps the one thing all recessions had in connection was that they always ended eventually.
So, how do you make a decision?
Invest Or Not To Invest
Sharp drops in stock prices during a crisis or recession may give attractive investment opportunities. The market may undervalue some enterprises. Others may have a company plan that makes them more robust to a downturn in the economy.
However, there may be grounds to back down.
Financial markets follow a cyclical pattern of expansion, peak, recession, trough, and recovery. So far, every recession has gotten followed by a rebound. But the recovery has not always been massive or quick.
Furthermore, firms do not all behave the same way at different periods of the cycle. Some may take years to recover from a recession. Others may never recover. When you invest, you may make or lose money. If you don’t invest, you won’t incur losses, but you may lose out on the early stages of a rebound, or inflation may reduce your cash’s purchasing value over time.
How do you make your decision?
Understand your priorities. If you have a good financial position, a lengthy time horizon (the amount of time you’ll keep an investment), and a high-risk tolerance, you may wish to continue investing during a crisis or recession. If your financial situation is precarious, your time horizon is limited, or your risk tolerance is poor, you may be more likely to delay.
- Emergency funds: If you don’t have an emergency savings account, you should prioritize it before investing more during a crisis or recession. Regardless of economic conditions, putting money away for a financial emergency, such as a job loss or a temporary sickness or disability, should be a top priority.
- High-interest debt: If you are paying a greater interest rate on your credit card debt than you estimate you might make from proper investments, clearing off your debt and removing that item from your budget may be more vital during a crisis or recession than investing more.
- Short-term requirements: If you anticipate needing income for short-term obligations like rent, house repairs, college tuition, or medical fees, or if you want to retire in the coming years, you may not want to invest more since your time horizon may be too short to recoup any losses.
- Savings for retirement: Even during a crisis or recession, saving for retirement should be a priority. If you have a retirement plan or an individual retirement account, you may want to invest heavily to take advantage of the income tax benefits and, if applicable, your employer’s match.
Investment decisions are very personal and heavily influenced by personal circumstances. It is especially true during a period of economic boom or contraction.
A younger individual in excellent health with a consistent salary and solid job prospects could maybe be more willing to invest during a crisis or recession than an older person or someone in bad health with little funds for daily living needs. The main distinction is the temporal horizon. The younger individual can weather market volatility and earn more money to compensate for losses, but the older person cannot.
These generalizations may not apply to all investors in certain circumstances. The younger individual may have children and emphasize saving for their schooling. The elderly individual may have large assets and wish to leave a legacy for the future generation. In such instances, the time horizon may be reversed.
Furthermore, investors may have a higher risk tolerance than others and feel more at ease investing during stormy and unpredictable periods, regardless of their status.
If you decide to invest, whether during a crisis or recession or not, there are steps you may take to reduce your risk. Diversification, investing in Dividends, value investing, and dollar-cost averaging are four time-tested tactics.
- Diversification: Diversification is the practice of investing in a wide range of stocks, bonds, and funds that correspond to your time horizon and risk appetite. The idea is to mitigate the chance that some of your assets may outperform others. To be well-diversified, you don’t have to invest in everything, but you should pick more than one company’s shares.
- Invest in Dividends: If you’re going to invest in equities during a downturn, opt for established, large-cap firms with robust balance sheets and cash flows. These corporations are not only better positioned to withstand economic downturns than smaller companies with inadequate cash flows, but they are also more likely to pay dividends. Dividends serve several functions for investors. For starters, if a firm has a lengthy history of paying rising dividends, you may be certain that it is financially solid and can withstand most economic conditions. Second, dividends serve as a return buffer. Even if stock prices fall, you will still earn a return on your investment. Dividend equities beat non-dividend stocks during market downturns for these reasons. Mutual funds or exchange-traded funds (ETFs) that invest solely in dividend-paying firms are the best method to hold dividend equities. Funds that invest in firms with a long history of paying dividends and a positive track record of raising those payouts tend to provide high current yields while capitalizing on capital appreciation.
- Investing with a plan: Consumers must purchase food, medications, hygiene goods, and medical supplies even during recessions. These are household necessities that are the last to be trimmed from the family budget. So, although firms selling flat-screen TVs and other discretionary items see revenue declines, those selling food and needs do not. As a result, consumer staples businesses are frequently referred to as defensive stocks, as they tend to be strong even when the economy flounders. During a crisis or recession, you should avoid investing in firms or industries that are cyclical, speculating, or high risk, such as untested startups, hospitality services, and makers and merchants of luxury consumer products. Instead, search for stable firms with minimal debt, positive cash flow, and proven markets for their products and services. Utilities, defense contractors, supermarket and discount stores, burial services, and makers of guns, alcoholic drinks, cosmetics, and consumer essentials are among the examples. Data reveal that these firms outperformed the S&P 500 over the previous five recessions. Johnson & Johnson, Procter & Gamble, Conagra, and Walmart are examples of consumer staple firms. These firms often pay high dividends, which adds to their defensive profile. Other mutual funds just invest in consumer staples.
- Dollar-cost averaging: Like most recessions, the next one is unlikely to occur. But if it does, a stock market sell-off will occur far ahead of a recession. When this happens, keep the first lesson in mind: After a recession, there comes recovery. Knowing this, investors may use the dollar-cost averaging strategy to profit from a sinking market. You are already adopting the strategy if you make monthly payments to a qualified retirement plan. However, when the market begins to fall, it is time to capitalize by raising your contributions or beginning dollar-cost-averaging in a non-qualified investment account. When you dollar-cost-average your assets, you gradually reduce your overall cost basis in the share value, ensuring that when the price level rises, your cost basis stays lower. For example, if you put $500 into a mutual fund that trades for $25 per share, your money will buy 20 shares. If the stock drops to $20, your gift will buy 25 shares. Your account currently has 45 shares with an average cost basis of $22. As the share price falls, your $500 investment buys a greater number of shares, and your cost basis decreases. When share prices rise, your monthly payment buys fewer shares, but the current share price is always more than your cost basis. Over time, the dollar-cost-averaging strategy works best for investors who do not want to fret about how their assets are performing. Dollar-cost averaging involves investing equal quantities of your assets at regular times rather than all at once. You are free to select any sums and dates that are appropriate for you.
Four investments to invest during a recession
When markets collapse, many investors’ immediate reaction is to sell to avoid the anguish of losing money. By discounting equities at these times, the market increases future profits for investors who buy them. Great firms are well positioned to succeed in 10, 20, and 30 years, so a drop in asset prices implies your potential future returns will be much greater.
So a recession, when prices are often lower, is precisely the moment to earn better profits. If made during a recession, the investments listed below have the potential for better long-term returns.
- Stocks that pay dividends: Consider adding dividend stocks to your portfolio if you want a less erratic portfolio. High dividend stocks are less likely to vary than other types of equities (such as growth stocks), therefore your portfolio will move less. They may provide a dividend payment to ensure you have some earnings while you prepare for the market to turn.
- Real Estate: During a recession, real estate is an alluring investment. To begin with, you may be able to acquire at a lesser cost than during a strong economy. People have more discretionary income when the economy picks up, and the value of your house may rise. Secondly, during a recession, when interest rates are far lower than they would be otherwise, you may be able to acquire a markedly improved mortgage rate. You may be able to secure a low mortgage payment for years, ensuring that even if interest rates climb in the future, you will still have a modest mortgage payment. In recent years, several investors have done just that, acquiring a 30-year loan at or below 3%. As inflation continues to climb, they will be able to pay off their mortgage with fewer dollars, making real estate a tempting inflation hedge.
- High-yield savings account: Because many recessions are brief, cash may be an effective short-term investment. With money, you have a lot of options. You can use it if you need to, such as if you are laid off during a recession, and it permits you to make an advantageous investment if the stock market falls suddenly or if you later find the perfect house. However, keeping too much cash has a drawback. Inflation consumes your funds, and you are unlikely to earn enough interest to compensate. Place your funds in a high-yielding online savings account and invest it wisely.
- Stock mutual funds: During a recession, a stock fund, whether an ETF or a mutual fund, is an excellent investment. A fund is less erratic than a portfolio of a few firms, and investors bet less on any particular stock and more on the economy’s recovery and an increase in market sentiment. And, if you can endure the short-term volatility, a stock fund has the potential for substantial long-term gains. Investors who don’t want the inconvenience and hazards of investing in individual equities can choose well-diversified funds.
Choosing whether to increase investment amid a recession or crisis can be a surprisingly personal decision. What works for you may not work for someone else. Any investment you make during a recession should get carefully considered. Whatever you select, be sure you understand the dangers and the benefits.
But, if you are keen to invest in real estate, contact Assetmonk. Assetmonk encourages clients to diversify their investments. So, you may seek guidance from our specialized asset and property specialists. Assetmonk offers residential and commercial real estate modules, such as co-living and senior housing, which are highly appreciated and selected projects. Investing in them would be a good decision.
Investing During The Recession FAQs
Yes. But, investors should avoid investing in firms that are heavily indebted, cyclical, or speculative, as these companies are the most likely to perform poorly.
Investors should not invest in firms that are heavily indebted, cyclical, or speculative, as these companies are the most likely to perform poorly.