Economic recessions don’t come around too often, but when they do, their consequences can be devastating.
The last recession, which began in December 2008 and ended in June 2009, wiped out millions of jobs off the U.S. labor market. The real estate industry alone lost $8 trillion.
It’s 2020. The COVID-19 crisis is threatening to send the economy into another recession.
As an investor, or if you’re looking to invest your money for the first time, you’re probably wondering whether now is a good time. Well, you can invest!
Here’s how to invest during a recession.
Understand the Effects of an Economic Recession
Conventional wisdom would tell you investing during an economic recession is a bad idea, and for good reason.
During a recession, businesses aren’t thriving. In fact, it’s commonplace for thousands of businesses to close down during this period.
Since the economy is recording negative growth, money isn’t ending up in the average person’s pockets. As a result, most consumers have no money to spend during a recession. And even if they do, they focus on saving and spending as little as possible because uncertain times lie ahead.
Why would anyone want to invest when the circulation of money in the economy is very low?
Let’s say you’ve not been affected by a recession, so you’ve got enough money to start a business, perhaps to replace the ones that have shut down.
This might look like a smart move, but when you look closely, you’ll realize that the business won’t thrive because there will be no customers to buy whatever you’ll be selling.
You’re probably wondering whether the government can do anything to prevent a recession or bring the economy out of a recession.
Sure, the government, through the Federal Reserve System, does have the tools to influence the economy. But while these tools are usually effective for spurring growth, they’re not quite as effective when preventing recessions. Otherwise, we wouldn’t have any recessions.
Are You a Seasoned Investor or a Newbie?
Investing, even when the economy is growing, isn’t a rookie’s game.
People have lost lots of money after making poor investment decisions. You’ve probably heard stories of retirees who blew their savings in the stock market.
As such, a primary consideration to make when you’re looking to invest during a recession is your level of experience.
An experienced investor has skin in the game, which means they’re in a strong position to make smart moves. But if you’ve got no investment experience at all, now isn’t the best time to test the waters.
A mistake some rookie investors make is over-relying on recommendations made by TV analysts. During a recession, the stock market will typically be on a massive sell-off. It’s not uncommon to hear TV pundits saying that some stocks have bottomed and should, therefore, be picked up.
This isn’t to say you should dismiss everything stock analysts say on TV, but the cold truth is no one knows how the market will behave. You could jump in and pick up stocks, only for the sell-off to continue!
This doesn’t apply to just the stock market. Any investment market can be just as unpredictable and brutal.
So, does this mean investment newbies should close their purses till the economy recovers and starts growing?
The savvy thing to do is to find an investment specialist and let them help you invest your money. They will charge you a fee or commission, but your risk will be greatly reduced.
Invest in Companies That Provide Core Products/Services
Companies that provide core products or services tend to be immune from the adverse effects of a recession. This is because core or essential products will always be in demand regardless of the state of the economy.
Take a pharmaceutical company, for instance.
Healthcare is an essential service. People aren’t going to stop seeking healthcare services just because there’s a recession. The reason most people stop spending on luxury or secondary needs during this time is so that they can be able to afford essential needs.
As such, companies in this sector continue to thrive. In fact, their stocks could gain more value during a recession.
When you’re looking to invest in an economic showdown, put your money in stocks of companies that offer core products or services. This being said, you need to study the movement of these stocks and find ideal prices before going all in.
While on the subject of stocks, be cautious about buying other stocks just because everyone believes their share prices have bottomed. It’s correct that a recession presents an ideal opportunity to invest in the stock market. A sell-off is usually followed by a bull run.
However, don’t jump in when the sell-off is still ongoing. Wait until there is solid proof that the market has started going up before jumping in.
Real Estate: A Prime Market During a Recession
Beyond the stock market, the real estate market is the next destination for most investors in North America.
Real estate is typically a pretty safe investment. However sharply property values fall during a recession, the land and the building will always remain. Give the property enough time and it will surely regain the lost value.
However, having a mortgage can complicate things.
In 2009, one in four homeowners found themselves “underwater.” This means their homes lost more value than the value of their mortgages.
If you’re a homeowner with a mortgage, investing during a recession might not be a sound idea, especially if you haven’t got a healthy savings account.
However, if you’re ready to invest, now is the best time to add a couple of real properties to your portfolio. During a recession is the lowest most property prices will get, so this is a chance to buy low.
Keep in mind, though, that investing in real estate is a patient man’s game. Don’t buy a property today and expect to make money when you sell it in a year’s time. In fact, it’s possible that you’ll cut a loss.
Be prepared to wait for more than a decade if you want your investment to yield impressive returns.
Are there any specific types of real estate property you should focus on when investing during a recession?
Residential properties, especially single-family homes, tend to lose the most value when there’s negative economic growth. They also gain the most when the economy is thriving.
Precious Metals and Safe Haven Currencies
An economic recession is usually a global phenomenon. Almost every country across the world will be affected negatively.
This means local currencies aren’t spared.
If you know a thing or two about investing in currencies, then you know a recession is the best time to buy safe-haven currencies. These are currencies investors believe are less-vulnerable to the economic effects of a recession.
The Japanese Yen and the Swiss Franc are good examples of safe-haven currencies. These are the currencies you want to have when there’s a recession.
Precious metals, such as gold and silver, are also a good buy during this period.
The only problem with this investment strategy is you will have to be keen on your timing if you want to earn fat profits. Usually, the prices of precious metals and the values of safe-haven currencies will start to rise as soon as there are signs that a recession is imminent.
So, by the time a recession hits, these assets will be pretty pricey to buy.
Invest in Yourself
You probably didn’t see this coming!
But yes, investing in yourself during a recession is a thing you can do. Plus, it’s the least risky investment you can make.
Instead of using your savings to invest, you could pay for a course and learn a new skill. Perhaps you could take up a coding class. Or you can learn a foreign language.
Be sure to acquire a skill that will benefit you when the economy recovers.
If you’re a diplomat, for instance, there’s no doubt learning a new foreign language will boost your career. If you’re in formal employment, taking an entrepreneurship course could help you start a profitable business.
Now, especially, is a good time to invest in yourself. With most of the country in lockdown because of the coronavirus pandemic, use your time at home to learn something new online. A new skill could be all you need to assure yourself of a lifetime financial growth.
Keep Learning How to Invest During a Recession
The economy is bleeding, but we’re not in a recession yet. Nonetheless, resolving to learn how to invest during a recession is a good idea. If the economy slumps into a recession, you don’t want to wait until the economy recovers to start making profitable investments.
With this guide, you’re now in a better position to make informed investment decisions.
All the best and keep reading tabs on our site for more investment tips and insights.