What to Invest in During a Recession?
Is the recession a good time for investors to build or expand their investment portfolio? Which assets are safe to invest in during this period? And, how much risk should you take?
An economic downturn that lasts for two consecutive quarters can lead to a recession. It doesn’t only mean hampered economic growth, but recession implies fewer jobs, heightened interest rates, and poor financial conditions. This makes investors wonder if they should save the cash or invest their earnings in real estate or stock to improve their portfolios. First things first, there’s no recession-proof investment. You need to develop a solid investment strategy to deal with the economic downturn effectively.
While the idea of investing in any asset may sound daunting during a recession, it isn’t that challenging if you know where to invest. Before making any investment decision, you must understand your goals. Do you want to create a fixed source of income? Do you have the goals to maximize your returns? Or do you simply want to invest in the stock when the prices are low due to an economic downturn?
Is Investment Safe During a Recession?
A recession occurs with inflation and a downturn in the stock market. It’s obvious that a recession might not look like the best time to consider investment, but we can’t deny that it also comes with many opportunities that can build your portfolio. For example, the low prices of stocks mean investors can buy them at discounted prices and sell them at a higher price after the economy has recovered. At the same time, some companies might have an increased risk of going bankrupt. You need to choose carefully.
Ideally, if you are considering stocks, look for companies with a solid reputation, low debt, and a good track record. Choose companies that have historically performed well in these times. Just because the stock prices have lowered doesn’t mean every company is safe. Investment can turn out to be a sound decision only in the following situations.
- You have a sufficient emergency fund to cover your basic expenses for 3-6 months
- You don’t plan on getting any returns for the next 6-7 years. Your portfolio might look bad when you buy cheap stocks for the first few months following the recession. The investment makes sense only if you are willing to wait for years for returns.
- You have done it before. A professional and experienced investor knows how to make investment decisions when the economy is in bad shape. They don’t check their stock portfolio every second to monitor the sudden stock movements. If you repeatedly check your investment portfolio, chances are you will end up making rash decisions, which will eventually result in losses.
Investment during a recession is for people in a good financial position and those willing to keep their money invested for a long time. This leads us to the question, “which market is safe to invest in during an economic downturn”?
Sectors that Perform Well During Recession
Before you choose a company, you need to pick a niche market. Once you know which industries perform well during this time, it will be much easier to select the most profitable niche. Here’s a list of the industries that are safe to invest in during a recession.
- Communication and telemarketing
- Discretionary and consumer staples
- Healthcare
- Financial sectors
- Real estate
- Utilities
- Information technology
- Energy
The industries that weren’t doing well during the recession might outperform the thriving sectors because of a shift in customer demand. If there’s one industry that remains stable, whether there is an economic upturn or downturn, it is healthcare. We have seen how the sector not only thrived but did exceptionally well in the COVID pandemic. The healthcare industry comprises pharmaceuticals and biotech.
Consumer staple is another sector that tends to thrive regardless of the economic condition. The sector covers personal goods for consumption and daily use. Beverages, packed foods, liquid items, and other household products fall into this category. Consumer discretionary, which includes the products that we need, also performs well during a recession.
Other companies might fail and go bankrupt during a recession, but a consumer staple industry can never face challenges during this time. That’s because no matter the times or your financial status, you are going to go to the doctor sometime, buy food, and stock up on toilet paper. Does that mean these industries perform well throughout the year and in all seasons? Well, no. Consumer staple doesn’t seem a wise investment idea during a boom period. For example, buying stocks of a company that deals in consumer staples in a bull market might not be a good idea, as people tend to invest in fashionable and luxury items that are in trend. However, in the bear market, most investors prefer consumer staple sector.
Healthy Companies for Investors
If you are planning to invest in stocks, you might consider the industries we have listed above. However, that alone doesn’t guarantee a profitable investment. To determine its financial stability, you need to look into the company’s profile, current debt, previous performances, cash flow, and balance sheets. A positive cash flow is a good sign and shows the company’s ability to deal with difficult times. Simply put, you need to identify the companies that are likely to perform well in all economic times — whether good or bad. On that note, let’s check out the best investment opportunities during a recession.
Stock Funds
Stock funds, like mutual funds, tend to be comparatively less volatile than other short-term investment products. It’s much better and safer than stocks of different companies. Besides, stock funds guarantee long-term returns if you can digest the short-term volatility. If you don’t want the risk of investing in a single stock, mutual funds are your best bet.
An index fund is another example. Instead of spending on a single company, you can invest in index funds that will distribute your money to all the companies that form the particular index. This will give you a more diversified portfolio. Even if one company goes bankrupt, the loss will be balanced by the other company’s growth.
Dividends
Another great product to add to your portfolio is the dividend. These stocks are relatively less volatile and offer a stable income for a specific period. Even when there’s an economic downturn, you can expect some cash from your dividend stock investment.
Real Estate
If you have enough savings and you are looking for an investment that can generate high returns, rest estate is your best option. Besides, there couldn’t be a better time than a recession to buy the house you’ve always wanted. As the property prices drop, it gives investors a wonderful opportunity to invest in real estate and sell these properties at a good price when the economy recovers and the property prices return to normal.
Another advantage of a real estate investment during a recession is that you can secure a mortgage at a much better rate than usual. Banks lower the mortgage rate significantly, allowing potential investors to finance their home purchases easily. This is the perfect time to lock in the best mortgage rate for years.
Investments to Avoid
Knowing which investment you should avoid during an economic recession is as important as selecting the companies to invest in. And since we live in a forward-looking market, there’s no doubt the prices of stocks might have started declining long before the market went into recession. Weak companies are likely to go bankrupt. Just because the stock prices have dropped doesn’t mean they make a good investment. Remember, they are low for a reason. Let’s take a look at the investment strategies that can fail miserably during a recession.
- You Can’t Time the Market: Usually, people make an investment thinking that the market will recover shortly, but you never know when that happens. Nobody can be certain that the market will see an upturn and that the stocks you have invested in will see a rise in prices. Your best bet is to invest in stocks that you are ready to keep for years.
- Avoid Day-trading: Beginners often start with an investment journey with day-trading. While that may seem a good idea if you are just starting, day-trading is not a great investment strategy during a recession. You should think long-term here.
- Don’t Sell Just Yet: The first thing an investor does when the market crashes is sold their stocks. It’s obvious. You might want to sell your stocks before the market gets worse. That’s called panic selling. A good investor waits until the market recovers. If you have invested in reputable companies that have survived previous recessions, you don’t have to worry about anything.
These are a few tips every investor should remember when making an investment during a recession. While it’s safe to invest, you should do it carefully. Understand the market. Evaluate your risks. And choose a niche market that’s likely to thrive during the recession.