Although it may seem counterintuitive, there are several opportunities for investing during a recession.
You can take advantage of relatively cheap prices – for stocks and real estate, for example – and simply hold on until the economy recovers.
A recession is generally defined as a period of declining GDP for two or more consecutive quarters.
Along with tepid growth, recessions are often accompanied by widespread job losses, restrictions in available jobs along with an increase in government relief in the form of stimulus payments or beefing up unemployment benefits.
Let’s look at smart investments during a recession.
The Benefits of Investing During a Recession
One of the benefits of investing during a recession is that you’re likely to get relatively cheap buys as the economy slows. The value of stock and real estate, for example, are likely to go down.
This means you can buy things at a relative discount, hold out for the recession and then reap the benefits when prices return to normal.
You should only do this if you have enough emergency savings to get you through. Don’t invest in a great deal if it’s money you’re going to need in the short-term.
You can also take advantage of relatively cheap money as interest rates go down.
Investment Opportunities During a Recession
Let’s look at some of the possible investment opportunities during a recession.
- Core sector stocks
Although many might be inclined to give up on equities altogether during a recession, some experts say there are some stocks worth buying.
Focus on sectors that are unlikely to be affected by the prevailing economic headwinds, including healthcare, utilities and consumer goods. People are going to spend money on these things regardless of how bad the economy is.
- Dividend stocks
Another addition to your portfolio during a recession are dividend stocks. These generally fluctuate less than other kinds of stocks, such as growth stocks.
This makes them an ideal candidate during turbulent economic times.
The other advantage is that they offer a cash dividend that means you’re getting some income while you wait for the markets to stabilize and ultimately pick back up again.
- Stock funds
Instead of choosing a handful of individual stocks, consider investing in a stock fund like an ETF or mutual fund. These tend to be less volatile and will diversify your portfolio so it’s unlikely to take a significant hit if one of your stocks plummets in value.
Stock funds are well-diversified options that usually return a healthy annual return over the long haul.
The S&P 500, for example, has generally grown around 10 percent over time. An index that tracks that would yield a similar return.
- Real Estate
Buying property can be an attractive investment during a recession as prices generally go down – giving you the chance to snag something for less than you would during a strong economy.
You can rent out the property in the meantime with the goal of selling when prices recover.
You’re also likely to get a much better mortgage rate during a recession as central banks aim to cut rates to spur growth. You could lock in a discounted mortgage payment.
- High-yield Savings Account
You want to keep enough cash on hand as an emergency fund so that if you lose your job, you’ll be able to cover your bills.
But you don’t want to keep too much on hand.
You could consider a high-yield savings account so that your money grows a little while you weather the economic storm without putting it at risk in a volatile market.
- Recession-resilient SMBs
Another potential investment opportunity during a recession is to purchase a small business in a recession-resilient industry like home services.
You can use an SBA loan to get relatively cheap capital and purchase a plumbing or HVAC company.
No matter how much belt-tightening is going on, people will always spend money to get their toilet unclogged.
How to Evaluate Potential Investments During a Recession
One of the best things you can do when evaluating potential investments during a recession is to keep your emotions in check. This is true with all investment but is particularly important when things are rocky.
Prices will certainly fluctuate, perhaps a lot, so don’t panic if things go down in value.
It doesn’t matter if you take some short-term losses for long-term returns.
You should generally take the long view when investing during a recession so evaluate all your opportunities through that lens. Some experts suggest a seven-year timeframe for most investments so only choose something that fits the long view.
You should also remember to only invest money that you won’t need in the short term. Don’t choose an investment that requires you dipping into your emergency fund.
It’s also wise to consider working with a professional advisor during a recession to help you evaluate potential opportunities.
Conclusion
There are several opportunities for investment during a recession.
Think about buying some core sector stocks in healthcare or utilities, these are services that people will need to rely on regardless of how bad the economy is.
High-dividend stocks can also pad out your portfolio, earning you some cash while you wait out the recession. Stock funds, like an ETF or mutual fund, are also strong choices.
Another potential opportunity during a recession is to invest in real estate while prices and mortgage rates are low.
Remember to keep a cool head and an even keel.
Stocks will likely go down in value in the short-term but remember that you’re investing for the long haul.
