Is a Recession the Right Time to Invest?
Since 1854, the United States has experienced 33 recessions. And these downturns have been occurring around every 5 years. We passed this some time ago, and we’re sure to do it repeatedly. There are silver linings even in the midst of an impending recession. All you need to do is be aware of what you’re searching.
Which Industries Are the Best for Investing During a Recession?
Specific industries are more resilient to economic downturns than others. The industries listed below are the best to invest in during a recession.
Consumer Goods - When the economy suffers, non-essential products such as entertainment, clothes, and other non-essential items suffer the most. During recessions, sectors that supply critical consumer staples such as toilet paper, cleaning supplies, personal hygiene items, food, and so on tend to do better. Thanks to the pandemic of 2020, we’ve already seen this happen. Kroger, Dollar Store, and Home Depot are excellent examples of firms that will thrive during a downturn. During the COVID-19 crisis, fast food and meal delivery firms maintained consistent business, as they usually do during recessions when consumers seek cheaper food.
Retailers With Discounts - When the economy is terrible, businesses in the discount retail industry thrive because people cut back on their spending and search for bargains. Even non-bargain hunters are searching for a good deal, especially when money is tight and the economy is poor. Costco and Sam’s Club provide basics at a discount, and even non-bargain hunters are looking for a decent deal.
Utilities - Utilities, such as electricity, remain a necessary expenditure even in difficult times. People need to keep the lights on and stay connected now more than ever. Remember that utilities are more of a defensive investment because the market moves slowly but steadily.
Medical Assistance - Historically, the healthcare business as a whole has done well during recessions. While the current recession is unique in that a worldwide pandemic is driving it, the healthcare business is as robust as it has ever been. Furthermore, our aging population and increased need for medical care strengthen this business even further.
Companies That Provide Service And Repair - During a downturn, services such as restaurants, bars, and cleaners frequently suffer as customers give up their pleasures first. However, during recessions, the service and repair sectors grow because firms and people tighten their belts and opt to repair rather than buy new. Service and repair businesses were designated as “vital” under COVID-19.
Industries That Are “Static” - The phrase static refers to something constant, stable, or steady. As a result, these static industries are untouched or unaffected by the state of the economy. Funeral services and health care are examples of this.
Industries of “Sin” - Recessions may be difficult for many people, businesses, and sectors. Those in the “sin” sectors (not my words) such as alcohol, cigarettes, marijuana, and even chocolate(!) thrive during economic downturns. This is most likely because customers seek respite from their emotions and anxieties when the economy and market are down, prompting them to look for it elsewhere.
Purchasing Real Estate - Qualifying for a mortgage loan has been far more complex in previous recessions. Recently, a trend has emerged a high demand for renting properties due to job losses or bankruptcy. There has already been a scarcity of affordable homes in recent years. Rental applications for single-family homes increased last month in certain areas. Stay-at-home and social distancing orders have been issued around the country as a result of COVID-19. People are seeking more attractive homes to “shelter in place” for the foreseeable future because there are so many unknowns regarding how long this epidemic will persist. What Should You Invest In During A Recession? - When the economy is in a slump, assets that are highly leveraged (with a lot of debt), cyclical, and speculative are the ones that suffer the most. Investing in these firms might be hazardous because there’s always the possibility that they’ll go bankrupt. During a recession, they are the most vulnerable. Invest only in firms with low debt, consistent cash flow, and strong balance sheets. Counter-cyclical equities do well in downturns and appreciate regardless of the economy.
Tip #1: Gold And Silver Are Good Investments
During a recession, gold and silver are both suitable investments to hold since their value is not affected by the stock market. Prices generally rise when the market is down because these commodities do well when the market is down. While gold and silver will not lose value during a recession, purchasing a large quantity may be difficult if prices are high.
Tip #2: Maintain Your Recession-Proof Stocks
Have you ever heard the term FOMO? It is an abbreviation meaning “fear of missing out.” Why not use the acronym FOLM? Most likely not, because I made it up. When the economy tanks, people’s fear of losing money skyrockets, and understandably so.
However, selling all of your investments during a recession is the worst moment to do it. If you take a near-sighted approach to the stock market, you’ll virtually definitely lose money. When it comes to the stock market and the economy, we can depend on that it will vary. According to Newton’s third rule of motion, what goes up must come down, and vice versa.
The market is the same way. A downturn always follows a flourishing market. Those that invest in historically strong stocks or buy when the market is low always come out on top. During a recession, I don’t recommend holding all of your investments. Keep the excellent ones, get rid of the others, put your money elsewhere, and don’t let FOLM keep you up at night.
Tip #3: Investing In Real Estate During A Recession Is A Good Idea
During a recession, property values in some markets fall, mortgage interest rates are often low, and rental demand is stable but minimal competition from other investors/buyers. Real estate, like gold and silver, is a tangible asset. Buying at a low point in the market to take advantage of reduced prices and interest rates may also be a wise investment during a downturn. If you own one or more homes, they may have depreciated. But, unlike the stock market, this does not imply you will never get your money back. Even during a recession, real estate markets and prices will rise as the economy recovers, making it one of the finest long-term investments.
Tip #4: Invest in Recession-Proof Stocks
Stocks have risen in value through time, averaging 7% each year in the past. This includes dividends and is inflation-adjusted. Investing in equities during a recession allows investors to double their money more. It appears to be a no-brainer, right? That’s right, it is! However, to get these returns, investors must hold the stock for at least 20 years.
So, why are so many individuals frightened or hesitant to participate in the stock market during a downturn? It has a lot to do with having a short-term perspective. For example, I’ve already lost money and will continue to lose money, so I’m selling my stocks and exiting while I still can.
During a recession, individuals lose out when they allow their emotions to take over and go into survival mode instead of adopting a long-term investment attitude and sticking to it regardless of market changes.
There are also mutual funds and index funds that are more recession-proof than others, particularly today. During a recession, make sure they’re high-quality equities.
Tip #5: Bonds Issued By The United States Of America Can Help You Reduce Your Risk
Treasury Bonds, Bills, and Notes are entirely guaranteed by the US government and are popular during economic downturns due to their safety. You may invest in the US dollar by purchasing treasuries and avoid being affected by stock market fluctuations. Mortgage loans can be included in federally backed bonds (FHA). During a recession, this is another smart defensive and low-risk investment.
Tip #6: Dividend Stocks Can Help You Make Money During A Recession
As interest rates fall, there are fewer choices for investors wanting to make income as the stock market falls. Dividend stocks, on the other hand, have generally fared well during recessions. The primary risk you face with this investment is a dividend reduction. You may mitigate this risk by investing in stocks that generate positive, consistent cash flow and have minimal debt levels.
Tip #7: Invest In Health Care And Senior Living To Show Respect For Your Elders
The results of the 2020 Census have yet to be announced. Still, Baby Boomers are expected to be the second-largest population in the United States (second only to their offspring, Millennials). What is the significance of this? The need for health care and caregiver services will skyrocket as a large portion of the population, about 73 million people, enter or are well into their older years. Senior living and health care services will only continue to develop and flourish, making now an excellent moment to respect and invest in your elders.
Tip #8: Turn On the Lights! Utilities to Purchase
Utility stock investing is almost risk-free. Utilities, as we said in the industry section, are unlikely to provide large profits. However, they have the benefit of being defensive. Electricity will always be in demand, especially given that we rely on the Internet and technology to keep our businesses operating from afar. Slow and steady utilities win the race, making it a fantastic investment to purchase during a downturn.
Tip #9: Diversify And Protect Your Portfolio
Before a recession comes, in an ideal world, you’d have a well-diversified investment portfolio. Hopefully, you’ve already entered that environment and are ready to face the next recession with as little stress as possible. If you don’t live in that environment and are concerned about any of your assets, there are specific steps you may take to decrease your risk. To reduce your risk and keep your money secure, look for defensive, recession-resistant assets (like the ones listed above).
Tip #10: Your 401(k) Contribution Limit Has Been Exceeded
Should you maintain putting money into your 401(k) account during a downturn or put it towards something else? Don’t quit donating is the quick answer. According to financial expert Charlotte Geletka of Silver Penny Financial, “the ideal time to invest in your 401k is when the stock market is down.” When equities are down, it’s a good idea to consider raising your contribution amount because your money will go further. It’s a long-term investing plan that pays off in a downturn.
Tip #11: Now Stay Full of Cash
Cash not only gives you freedom, but it also gives you peace of mind. Cash is essentially risk-free in a down market. While money in a money market or savings account won’t generate much interest, it’s an excellent short-term answer for being defensive during a downturn.
Keep in mind that this is not a medium- to a long-term plan. You’ll want to reinvest that money whenever the economy improves. The longer your money remains in a low-interest savings account, the less purchasing power it has.
Start putting these suggestions to work now that you know what prudent investing during a recession should look like! Reevaluate your portfolio and devise a strategy to diversify your assets and protect yourself if you believe you need to reduce your risk. Recessions can be extremely painful, but they can also provide chances for well-prepared and wise investors.
* The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained on our Site constitutes a solicitation, recommendation, endorsement, or offer by De Angelis & Associates or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content on this site is information of a general nature and does not address the circumstances of any particular individual or entity.
Article initially appeared on WSJ.com
Credit: WSJ.com, NYSE
© De Angelis & Associates 2022. All Rights Reserved.