How to invest during a recession
As a savvy investor, you need to learn how to succeed in both the ups and the downs. We take a look at some recession-busting investment moves.
What is a recession?
According to the National Bureau of Economic Research (NBER), a recession is a “significant decline in economic activity that spreads across the economy and lasts more than a few months.”
The NBER doesn’t currently believe that the US is in a true recession – it hasn’t declared one since the economic crisis of 2008–2009.
When deciding to announce a recession, the NBER examines various information drawn from diverse market sectors, including unemployment and personal income data.
What happens to investments during a recession?
In times of recession, some forms of investment suffer while others endure. For most investors, it would be wise to avoid these areas:
Highly leveraged companies – these companies have a high level of debt on their balance sheets, so they will struggle to make interest payments. They will also experience a decrease in revenue because of the recession. Shareholder value likely drops, and there is also the danger of bankruptcy.
Cyclical stocks – these are often connected to employment and consumer confidence, which both decrease during a recession. Cyclical stocks tend to be in companies that make non-essential luxuries – such as high-end cars or furniture – so they don’t perform well when people are cutting back.
Speculative stocks – typically the worst performers during a recession. These stocks are fueled by market and shareholder optimism. These are high-risk investments, often favored by people looking for the next big thing. The bubble around these unproven products bursts when recession strikes, as investors flee towards safer choices.
Not all stocks are unstable and overly risky during a recession. You could find yourself missing out if you pull out of the market completely to weather the storm. These areas are traditionally recession-resistant:
Companies with strong balance sheets – seeking out companies that maintain strong balance sheets during recessions can make sense. These often include conglomerates making basic consumer goods, utilities and defense stocks. By studying company reports, you can pinpoint organizations with low debt, good cash flow, healthy profits and a strong business model. These are known as countercyclical stocks, and demand for them tends to increase when incomes are squeezed and uncertainty prevails.
Five tips for investing during a recession
Here are five good pointers for sound investment during a recession:
Go for core sector stocks – you don’t have to give up investing in stocks when a recession strikes. Some sectors endure and flourish when times are tough. So, if you want to continue with stocks but protect yourself from the alarming market drops, consider healthcare, utilities and consumer goods. Medical care, basic household goods, food and power, remain essential regardless of what the economy does.
Invest in reliable dividend stocks – this can be a great way to generate income. You need to find companies with a low debt-to-equity ratio, but if you’re unsure where to start, go for the “dividend aristocrats.” This is a select band of companies that have increased their dividend payouts for at least 25 years.
Real estate – if the housing market drops during a recession – as it did during 2008 – this presents opportunities for property investors. While prices are depressed, you can buy and rent out to a reliable tenant, creating a steady income stream. Once the market recovers, you can consider selling your property at a profit.
Buy precious metals – silver and gold tend to perform well in sluggish markets, with demand and prices rising during recessions. The most straightforward way to do this is to purchase coins or bars directly from a specialist seller, although you will need to think about a secure deposit for your assets. Alternatively, you could invest in precious metal securities or Exchange-Traded Funds (ETFs).
Yourself – a recession allows you to invest in your own skills and potential. If you lose your job, it could be worth adding to your qualifications or retraining, so you can bounce back stronger when things improve. Take a look at your personal finances too. It always pays to reduce debt if you can, to prevent stress and worry while earning opportunities are compromised.
The bottom line
The key takeaway is to remember that recessions will always come and go. It’s part of a cycle. There’s no need to panic or make hurried or rash decisions.
To stay relatively secure and avoid sudden losses, build your strategy around companies with robust balance sheets from recession-proof industries and countercyclical stocks. In this way, you can grow decent profits and ride the economic turbulence. In the longer term, you will be well prepared to sell quickly and buy more profitably when confidence returns.
Holding your line in a volatile market takes knowledge, nerve and confidence. The best way to gain these strengths is to consult an investment advisor, who can guide you through the ups, downs and options towards a portfolio that meets your individual needs.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.