How to Build a Recession Proof Portfolio?
The very first idea that pops when we think of real estate investment is the dynamics of the market. Indeed every market has a turbulent history due to the business cycles, and so does real estate. It is the innate quality of the markets to fall and rise.
Business cycle here refers to the process where the business activities rise and fall, together making one cycle. The falling period is often attributed to the recession. A Recession is termed as the slowdown in business activities that persists for a significant time. It affects the economy adversely and reduces the spending power considerably, in turn, impacting the business transactions and introducing the falling trends.
The gruelling trends of the market get to the trough and bring naive businesses to a halt. Before getting to know how to endure through the recession, let’s understand the ill effects of a recession.
Impact of Recession on Financial Markets
The sluggish market trends and the reduced spending power infuse a cash crunch in the market. The new undertakings in all the fields are reduced drastically. The shrinking liquidity of money is a characteristic of a recession.
The stock market has the highest volatility rate during the recession. As the market experiences a liquidity crunch, the investments reduce further, and the stock prices fall as the investors shift their investments to secured ones like government bonds.
Fall in Demand for Properties
The fall in demand for properties is characterized by reduced economic activity due to the recession. The slowdown of the economic activity stirs the market with uncertainties which pull down the demand sharply.
The Decline in Prices of Assets
The prices of the assets decline substantially in the wake of the recession. This is, in fact, the consequence of a fall in demand. As the demand falls, the prices are lowered to boost the market.
Though this sounds overwhelming to the buyers, the cash crunch that the recession brings with it due to the layoffs subsides the advantage. The fall in prices is, of course, a piece of unpleasant news for the property owners. The recession hence creates a lose-lose situation for both the owners and the buyers.
Layoffs pull the Market Down Further
The word recession brings a shiver down the spine for the consequences we may have to face. The layoffs, crashing markets, and plummeting economies brought by the recession have grilled the most powerful nations worldwide.
The sluggish economic activities downtrend the markets and pave the way for the layoffs. It forces the sale of properties at a price much below the markets for the sustenance of the families. This might pull the market limits even lower.
How to Recession Proof Your Portfolio?
Recession is seen as an inevitable phenomenon that the experts predict to recur every five years or a decade. The recession does not necessarily mean to doom your hard-earned investments. Here are strategies that you can adopt to make your portfolio recession-proof.
Diversify your property speculation
Investing in multiple properties always strengthens your position against drooping factors like the recession. Not all investments suffer the wave of recession. Some of them get through reasonably well. So, if there is any asset that underperforms, your portfolio might still be able to run into positive returns if you have diversified your portfolio smartly.
Not only your investments must be diversified, but you can prefer to invest with companies in diverse fields, in other words, conglomerates. Such companies get along with the recession with ease due to their presence in various sectors that leads to a strong financial background.
Long Term Investments are Resilient to Recession
Recession is a passing cloud for long term investment. Generally, recession persists for several months, an average of one year. If you plan for long term investment, then you are likely to see that the recession cycles pass a few times. You also observe that the effects of the recession fade away as the recovery stage kicks in. The falling demand and tumbling prices are intermittent, as the industry gets back to normal. All you need to do is wait for the storm to settle.
Set an Emergency Fund for Contingencies
You have to pre-plan for any unforeseen times like recession. It might impact your finances and may thrust you into selling your well-planned investment if you experience any misfortune in your job due to recession. Under recession, you may have the hard-luck of selling your asset for a lesser value. So, setting a sum aside may not require you to lose your investment.
Recession-Proof Investments 2020
Here are some smart investing during recession options that help you hedge against the recession and sail your resources well through the storm.
Rental properties are the anchors against recession. Housing is an inevitable expenditure. No matter what the market conditions are, having a shelter is the primary requirement. Investing in rental properties will never let you down. It stabilizes your spending power anchoring against recession.
Along with the steady passive income, you are backed by the physical asset which gets back to its appreciation curve post-recession. It is, therefore, a double rewarding investment.
Government bonds enjoy the advantage over private bonds for being the safest investment option as they guarantee the profits. The uncertainties that recession invites divert the crowd to invest in government bonds which increases the prices and boosts the bond market. It reduces the liquidity crunch as the government bonds are high performing assets.
Invest in Lower Economies
A recession in India does not necessarily mean a Global Recession. If you foresee a local recession that might make your investment volatile, you may choose to invest in lower economies. For instance, the US natives may invest in India and bag a property at a much lower expense.
You can continue your business transactions and earn through your investments by investing with lower economies which might not necessarily experience the wave of recession for the time being.
REITs – Real Estate Investment Trusts
Investing in dividend-paying stocks like REITs provide a source of stable regular income. Having other sources of income proves to be helpful during the recession as the spending power is decreased. REITs invest in multiple properties that diversify your portfolio to reduce risk.
Though REITs is a decades-old concept globally, it has just emerged in India in 2019 and is performing exceptionally. According to a report, REITs have outperformed the BSE (Bombay Stock Exchange) with a 14% ROI(Return On Investment).
When compared to the other volatile instruments like stocks, REITs are stable due to the diversifying portfolio, i.e., investing in multiple properties. So, investing in REITs is not going to disappoint you during tough times.
REITs do have a black spot in their history during the great recession of 2008-2009. REITs investments suffered due to the stressed banking sector. The stalling banking sector led to financing issues, and REITs faced a downtrend. Not every recession comes across such a phase and measures have been taken from then to strengthen the banking sector. But if you are suspicious about it, you can always choose the rental properties where a physical asset backs you.
Trending Investments like Data Centres and Warehouses
The trending investments ensure to keep up the demand high for the more extended periods to come, shielding your investments from recession. The warehouses and Data Centres have gained prominence due to the storage space requirements and digitization.
Recently, a tech-enabled startup has raised a whopping 140 crore fund through its fractional ownership platform to develop three warehouses across India. This shows the positive market trends amid these challenging times of pandemic.
In the same way, as e-commerce requires space for storing commodities, so does every sector for storing the data. Let it be the education sector or IT company; it is a prerequisite to have a data storage space that is served by the data centres.
As shivering as it sounds is the effects of the recession. You must be wary of underperforming assets like commercial properties during a recession. This is not to demean the investment in commercial property, but the new entrants into the commercial market are advised to check on the point of time of investment. The commercial market sets back into shape after the recession, but the new entrants have to suffer the jerk if invested during the times in proximity to a recession.
Recession is often seen as the testing time of the industry. Only the best and the fittest get through it. Investments with low debt can manage to sustain under low economic times due to the reduced pressure of repayment with the reduced returns.
With a plan in advance, you can get along with ease as there are investments like REITs and rental properties that work well in such conditions too. Diversifying your portfolio and getting well-versed with the market trends safeguards you from falling apart during the recession.
As India enters into a technical recession, it is time you hedge your investment against recession. It is time to add other sources of income to strengthen your finances. If you are planning to invest, some investments do their best during the recession. Assetmonk is an online platform that helps you sort your investment. We list out the properties that have undergone thorough due diligence. With various products like Growth, Growth plus, and Yield, Assetmonk offers pocket-friendly assets with an IRR of up to 21%. For further details, click here!
Recession Proof Portfolio FAQ's:
The essential utilities’ investment is the best during the recession as the demand exists irrespective of the market crashes. Investments like rental properties are essential utilities as shelter is the primary requirement for anyone across the globe. Such investments are expected to perform stably.
You can invest in multiple properties, or invest with companies that have a diversified portfolio to reduce the risk. Even if any of the assets do not perform well, other performing assets reduce the potential losses. Always investing in the long term helps you to get along with the short-term falls like recession which generally extends for an average of a year.
The warehouses and data centres are selling like hotcakes. They might not fall any time soon due to the economy heading towards digitization.
Dividend-paying stocks generate a regular income that supports your finances during the recession. They also have diversified investments like REITs which invest in multiple properties. This ensures a stable value for your dividends and hedge against the recession.