Investing in a Recession: Taking Advantage of an Economic Downturn

Camino Financial03 Nov 2023

Believe it or not, investing in a recession can actually be a smart idea. That's great news if there's an expected financial crisis rapidly approaching.

Recession investments are trickier than periods of growth. Actually, many quickly pull out of their stocks out of fear. Fortunately, with the right tips, you can use the recession to your advantage and come out on the other side wealthier! Let's talk about investments that work during a recession!

Should You Invest During A Recession?

No matter what economic times we face, you should always have some type of investment going. This could mean starting your own business or investing in the stock market, retirement funds, or a tangible asset, but investments are essential, nonetheless. Otherwise, your savings will yield 2% interest at most while your fortune gets eaten away by inflation. Yes, there are concerns about investing during a recession, but the truth is that there are always concerns with any investment.
#DidYouKnow Believe it or not, 14% of the time since WWII have been periods of recession in the US, which is great news for investors of today.
The trick is to be smart about what investments you make and that you make informed decisions.

What To Invest In During A Recession

Without recommending a specific company or asset, here are some ideas of how to make money investing during a recession.
#CaminoTip Just remember that diversity is key to reduce portfolio volatility, especially during economic recessions.

Defensive Stocks

Defensive stocks tend to remain stable through uncertain economic periods or bear markets. That's why they're one of the best investments during a recession. They are usually stocks in consumer staples, healthcare, and utility industries, hence their low market volatility. For example, stocks like Coca-Cola (KO) or Johnson & Johnson (JNJ) are defensive stocks, as they've performed relatively consistently during previous recessions. Stocks like these are a great way to diversify your portfolio during a recession, but you shouldn't expect to make enormous gains off of them. Defensive stocks are not growth stocks, but if the stock markets are in free fall, buying into these stocks could show some short-term growth in your portfolio!

Dividend Stocks

Dividend-paying stocks are companies that have already seen the majority of their growth. So, instead of building growth through equity, these companies pay dividends based on their established profits monthly, quarterly, or annually. Dividends can pay anywhere from 0.01% to 5% annually. If you receive 1.5% dividends and your ownership is worth $10,000, you will receive $150 annually in dividends, separate from any potential growth. Often, investors will choose to reinvest these dividends, as they will compound over time, yielding higher dividends in the future.

Value Stocks

Value stocks are companies that investors believe are underperforming on the stock market, meaning that they will be worth more than the market currently reflects and are financial opportunities in a recession.
#DidYouKnow These are different from growth stocks, which are companies believed to overperform market predictions in the future.
Adding value stocks to your portfolio can be very helpful, especially during a stock sell-off. However, you need to hold value stocks for a more extended period to receive any benefit. If you have money to invest that you're willing to sit on for at least a few years, consider adding value stocks to your portfolio.

Bonds

Bonds are a great way to diversify and keep your investments secure. These are slow-building, long-term investments with safe and stable returns. However, all investments come with risks. For bonds, your greatest risk is inflation. Even so, buying bonds is great for a low-yield, long-term investment with little to no volatility.

Inverse ETFs

Inverse ETFs (exchange-traded funds) with short exposure are popular investments. ETFs are collections of stocks or bonds pooled together, operating similarly to a mutual fund. When the stock market is tanking, this is a great way to diversify your portfolio, especially if you choose ETFs in the right sector (more on that later). Inventory Investment: Is It a Good Idea?

Sectors That Perform Well During Recessions

Different industries are more recession-proof than others. Of course, this doesn't mean that companies in these industries won't feel the effects of a recession, but they are typically more resistant to economic downturns. When looking for industries that can weather a recession, you want to consider the essentials. Some of the safest industries include:
  • Healthcare (like pharmaceutical companies)
  • Transportation
  • Education
  • Food and beverages
  • Consumer essentials
Of course, these are just on average. There's no telling what outside circumstances could do to these industries, especially during a recession.

Finding Stocks That Could Perform Well During A Recession

There are always ways to limit your risk when investing in stocks, starting with industry and company research. Understanding the industry and how it's historically performed during recessions is essential.
#CaminoTip The keyword here is "could", as nothing is a guarantee in the stock market, even during the best economic times.
More importantly, you want to find high-quality companies within that sector that has:
  • A strong balance sheet
  • Low debt
  • Profitability
  • Positive cash flow
A secure industry is essential for a safe investment, but it's important to consider these other factors when deciding, which will require closer examination of the company. Following these guidelines will help you decide what companies to invest in now.
What to do with your investments in a recession? If you already have investments, make sure you understand if the company can survive a recession. Consult with a professional to see if you should keep or sell those stocks.

Investing In A Recession: Rules And Tips

Consumers still spend money during a recession, so you can still make money if you're a wise investor. Here are a few general rules to follow if you haven't decided where to invest.

Consider Your Goals

What are your goals as an investor? Do you want to maintain your wealth and keep it safe from inflation to help secure your retirement? Do you want to build a secure network of dividends? Of course, investors want to make money, which is always the primary goal. However, it's essential to be specific about your timeline and the bare minimum of what you want from your investments. For example, someone who wants to invest in the short-term (under 5 years) may consider investing in value stocks, dividend stocks, and ETFs in reasonably safe industries. On the other hand, an investor who plans on a 20-year investment for maximal growth may consider a value stock in an industry like solar energy, which many expect to grow substantially in the coming decades. Finally, the investment strategy you choose will depend on your risk tolerance.

Use Funds You Can Spare

We all need a backup plan during uncertain economic times. However, recession investments should only come from disposable income, not your safety net. Let's say you have $60,000 in your savings account and a full-time job. Unfortunately, no job is truly recession-proof. In this case, keeping a minimum of $10,000 in your savings account would be wise to prepare for the worst. As a general rule of thumb, you don't want to invest anything you may need in the next five years, and there's no predicting how long recessions will last.
#CaminoTip Having an emergency savings account is a great recession-proof idea.

Research

If you're putting your money into it, learn everything about it. Making an uninformed or underinformed decision (especially impulsively) is a recipe for disaster, especially during a recession. It's especially important not to jump on the bandwagon. Consulting with a certified financial planner or stock expert will help you find the right investment strategy.

Diversify Wisely

Don't over-diversify, but don't under-diversify. When it comes to diversification, you need to find the sweet spot. Sticking to one stock or industry is a risk, but so is spreading your eggs too wide during a recession. So instead, stick to a few key industries and companies you understand or are willing to learn about.
#CaminoTip Other great strategies are value investing, and dollar-cost averaging.

Keep Track

Don't drive yourself crazy by checking and stressing about stock prices daily. Instead, do some basic accounting work and keep track of your financial investments over time to see how they perform. What types of investments can you make as a small business owner?

Investments To Avoid During A Recession

Here are some general guidelines to help you decide where not to invest successfully during uncertain economic times.

Growth Stocks

Investing in a newer company, especially one with a negative cash flow, is a bad idea during a recession. Only a few years ago, Uber and Spotify were some of the most overhyped stocks on the market. However, they underperformed and still aren't anywhere near profitable. Now, imagine if Uber's IPO was right now. Fewer people would take Ubers to work with layoffs and remote work, and there would be no guarantee of the company's sustainability. Of course, we are using one example here, which certainly isn't a fair metric for all growth stocks. However, they have historically performed poorly during recessions.

Luxury Stocks

Buying stock in Kroger (KR) is OK, as consumers will always need groceries. However, fewer people will shop at luxury stores like Gucci or similar brands if they don't have enough money in their pockets. These can be a good idea during a bull market, though.

What About Real Estate?

During a recession, the housing market can be unpredictable. It can be either a great or a terrible investment. Generally speaking, if you see the real estate market tumble, it's often time to buy. The market tends to trend upward over time, and real estate is a relatively stable investment with plenty of opportunities for growth and profit. Many still agree that real estate is the best investment around today. It makes sense when you think about it.
  • It's a tangible asset that often appreciates in value
  • You have options to choose from
  • You have total control over the investment
  • Everybody needs somewhere to live, regardless of the economy
What other investment gives you this level of control for only 15% to 20% down? You can choose from:
  • Real estate investment trusts (REITs)
  • Long-term rentals
  • Short-term rentals
  • Condo development
  • House flipping
The list goes on. There are thousands of popular strategies to choose from, but none are easier than REITs. REITs are publicly-traded real estate companies that pay out at least 90% of their profits to shareholders. As a result, you will receive dividends similar to dividend stocks. However, REIT dividends tend to be higher, often between 1% and 6%, with some going as high as 8%. So if the housing market is dipping lower, you may even see some growth! If there is an impending recession and an increasing housing market (like right now), then buying a rental property or a house to flip is a recipe for disaster. In this case, you can forget "location" and focus on timing, timing, timing. Diversifying your real estate investments in a time like this is much safer, but you will still run a serious risk of the "bubble" popping. Waiting until that happens and then diversifying is the safest solution. However, many investors believe the bubble will pop by 2024, so be careful.

Invest In Your Business

Investing in your own business during a recession can be a great idea because its fixed income can help you weather the storm and come out ahead when the economy rebounds. By investing in your business during a recession, you can have strong balance sheets, which can put you in a strong position when the economy improves. Additionally, investing in your business during a recession can give you a competitive edge over other companies that may be struggling. Finally, investing in your business during a recession can help you build a stronger and more resilient business better equipped to weather future economic downturns. If you need capital to invest in your business, we can help you. Apply now!  

Frequently Asked Questions

What to do in a recession?

When it comes to a recession, you can do a few things to minimize your risk and still make a profit. One of the first things you should consider is diversifying your investment portfolio. This means investing in various assets, such as stocks, bonds, and real estate. This will help to protect you if one particular asset class takes a hit during the recession.

What is the safest investment during a recession?

Defensive stocks and bonds tend to be the safest investments during recessions, as they are the least volatile. Investors also tend to flock to defensive stocks during recession periods, which can inflate the price.

How do you make money during a recession?

There are several ways to make money during a recession. One way is to invest in mutual funds or companies that are doing well despite the economic downturn (a well-diversified portfolio is key). Another way is to start your own business. Finally, you can also look for opportunities to save money and invest it in things that will appreciate over time. Having a job that offers a fixed income could also help you weather the storm.

What goes up during a recession?

Companies with strong balance sheets tend to perform the best during recessions. For specific industries, utilities and defensive stocks tend to perform the best.

Will there be a recession in 2023?

While there is no perfect measurement or tool to predict recessions, most recessions last longer than 6 months. It's very likely that the impending recession will continue into 2023.

What are some stocks that do well in a recession?

We can only speak historically, as nobody can predict the future. However, the following stocks have performed admirably throughout previous recessions:
  • Walmart (WMT)
  • Johnson & Johnson (JNJ)
  • Coca-Cola (KO)
  • United Health Group (UNH)
  • Pfizer (PFE)
  • Walgreens (WBA)
  • Home Depot (HD)
  • Dollar Tree (DLTR)
As you can see, these are primarily in the healthcare and consumer staples sector. Just know that past performance is not a guarantee of future performance.

How to invest during a recession?

Investing during a recession can be a difficult task. Many people worry about the future and whether or not their investments will be safe. However, recessions don't last forever. Eventually, the economy will rebound and start growing again. That's why it's important to have a long-term investment strategy in place. This way, you can ride out the downturn and be in a position to take advantage of the upturn when it comes.

*You should not consider the opinions in this article as investment advice.

 

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