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How to Invest in a Recession

Sadia Zaheer
August 15, 2022

Investments always involve some elements of risks, and there is no concept of an investment being recession-proof. However, picking investment options that are more profitable or immune to recessionary forces means that you can protect your returns from such investments.  Some types of shares, funds, and a mix of investment strategies can help you build your portfolio better to go through an economic downturn.

The recession alarms have been around since 2020. the pandemic started and caused the economy to stumble, recover, and get periodic jolts. The stock market and the interest rates have been see-sawing more than usual, and investments are coming into question. This is terrifying for people that already have money invested in the shares and other market instruments.

However, investing during a recession phase of an economy is challenging, but it doesn’t have to be. Just read ahead to see what you need to look for and the factors you need to consider.

Why Make the Effort to Invest?

Are We In a Recession? Maybe. These Strategies Can Help No Matter What the Economists Say | NextAdvisor with TIME

The value of our money is continually shrinking over time due to inflation. According to current inflation rates, rs. 10 today would only be worth Rs. 6 next year. If this rate continues, you will lose 40 % of your money annually if you keep it as cash. If the rates your bank offers are less than the inflation rate, you will lose money even if you save it in a bank savings account.

Investing your money should always give you better returns on your savings, regardless of all the effort and risk involved. Investments imply better returns and, therefore, an increase in income for you. It also means you have more money saved in the long run (even after factoring in inflation). Investing in multiple avenues can give you more than 10% per annum at the least, even now.

Things to Evaluate in an Investment

Choosing where to invest during a recession will first require you to consider your personal goals. Are you looking to:

  • Minimize the risk that an investment will fall in price during market volatility.
  • Maximize long-term returns?
  • Protect your money from inflationary forces?
  • Create a source of fixed income.
  • Take advantage of investing in the stock market while prices are low

Building a portfolio that applies all these strategies is an ideal scenario, but successfully applying any of them can have a significant positive impact on your financial position. Take a look at the options discussed to design a plan that suits your needs and preferences.

 

There is no sure-shot formula for investing money. What worked out for me may not work for someone else. The timing and planning of investment are both very critical. And lack of success at any time doesn’t mean you don’t invest. It means that you keep on looking for the route that is the best fit for your income and lifestyle. Once you find it, you keep on doing it on an ongoing basis.

Sectors that Perform Better during Recessions

Companies that list their shares on the stock market are divided into sectors. Sectors refer to the type of business the company is in. Some businesses are not affected by the recession as the product they sell has a fixed demand. Industries like telecommunication, monopolistic utilities like K-Electric, or SSGC,  healthcare services, and insurance companies that provide industrial insurance are some companies that will not be affected by recessions. Similarly, information technology providers, which fall under telecommunications, will not face a significant reduction in income.

In the same way, companies that cater to consumer goods will also not be affected by recessionary forces in the market.  Sectors like health care and consumer staples tend to outperform others as consumers manage according to changing economic situations. No matter how tough the situation, people must eat, go to the hospital, buy medicines, and get water to drink. These are the stocks that people should invest in during a recessionary phase as they will sustain their worth over the recession.

Similarly, other sectors like food and beverage, household and personal products, and tobacco will not see growth during recessions.  These cover products like clothing, restaurants, and luxury items, which are not the focus during tightening budgets. These stocks are not attractive during recessions (unless you have the capital to buy them at a low price for the long term). These stocks perform during a growing economy when people have money to spare on luxury items.

If you invest in individual companies during a recession, you can look for options in the abovementioned sectors. However, when you pick a stock, make sure that it has low debt levels, good profitability ratios, strong balance sheets with a low receivable cycle, and a positive cash flow. These are all critical for a company’s success in tough economic times.

Factors to look for When Investing

The most common choices for investing in the finance sector are stocks, bonds, and mutual funds. Other options are investing in real estate and small businesses, and many people eventually build up a mix of all these options when they get the opportunity.

The money you invest in stocks is increased through the dividends some of the stocks pay periodically to their holders. Bonds pay in the form of periodic profit payments according to the rate specified. At the end of the bond’s life, the bond’s total amount is returned to the holder. Making them one of the low-risk investment options.

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Real estate investments pay off through rental payments and value increases (also known as appreciation) over time. There are also real estate investment trusts (REIT), a form of mutual funds for real estate holdings. REITs are usually owners of commercial and residential properties that are rented out. The rental earnings are then given back to the investors. REITs are good for getting a regular flow of additional income from your investment.

Mutual Funds that Track Specific Sectors

Investing in managed funds, like exchange-traded funds (ETFs) or low-cost mutual funds, is usually less risky than investing in individual stocks, which can be particularly attractive for inexperienced investors in a recession.

Mutual funds are comparatively more advanced than shares and ETFs, as they invest in a mix of shares, bonds, and even real estate, and you can shop around for a fund that you find suitable. Mutual funds give returns in dividends, coupons, or even profits, depending on the type of assets they invest in.

Investing in any of these funds exposes you to a specific set of assets instead of just a single investment (like a company stock). In recessions, this is a way to invest in several companies in the most promising sectors while avoiding the risk of concentrating your money on a single company.  If one company in the fund does not perform well, the better performances of other companies help to adjust for the losses of the loss maker.

Investing in any form of funds helps reduce your risks and therefore helps reduce the threats to your capital compared to investing in stocks directly. However, lower risks usually imply lower returns, a tradeoff that all investors must make.

Invested Income

The income from different investments is called various things, depending on where it comes from. Stocks give dividends, mutual funds pay profits, and bonds pay coupons. These are all options that can be invested in over a more extended period.

A pro tip for investing is to make it a linked part of earning. You should invest some portion if you get paid for any service. You need to invest logically to build up your wealth. This will require your time and focus on the big picture.

Research details and tips, keep an eye on your investment sectors and shares, and keep updated with the latest news and rumours. Don’t go for it if you are not okay with a particular option like bonds, commodities, or even shares. Look for other options. Every investment option has some risks involved, and you decide which set of risks you will be more comfortable with.

By doing this as a habit, and over 5-8 years, you should have enough saved up through compounding and portfolio growth to have a sizable income stream prepared from your investment

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