As the old saying goes, what goes up must come down. And while the stock market has been on a tear in recent years, investors would be wise to remember that recessions are a reality of the business cycle. This begs the question: What are the best investment options during a recession?
A financial advisor can help you build a portfolio, taking into account a growth and quality bias designed to weather economic downturns. This will help ensure that you create a portfolio capable of providing a high ROI over time. From investing in stocks to buying real estate, you have plenty of investment options available when a recession hits.
1. Find core sector stocks
During a recession, investors may be tempted to sell their stocks and move to safer investments, such as bonds or cash. However, experts typically recommend against completely fleeing equities during a recession. Although the stock market may experience more volatility during a recession, there are often a handful of sectors that continue to perform well. For example, essential items such as food, electricity, household items, and healthcare products tend to be less affected by a recession than luxury items. As a result, companies in these sectors may continue to generate strong returns for shareholders even during a recession. Therefore, rather than selling all of your stocks, you may want to consider carefully which sectors are likely to weather the economic storm.
2. Keep an eye on reliable dividend stocks
Dividend stocks can generate passive income during a recession. Most experts agree that you should choose dividend stocks with strong balance sheets and a low debt-to-equity ratio. Companies with low debt-to-equity ratios tend to have less debt and more equity, which can make them more financially stable and less risky. Strong balance sheets also indicate that a company has a good financial foundation.
3. Invest in real estate
When the housing market collapsed in 2008, many investors were able to buy properties at a fraction of their previous value. As the economy began to recover, these same properties increased in value, leading to healthy profits for the investors. Of course, not every recession will lead to such favorable conditions for real estate investing. However, when home prices drop, it is worth considering whether an investment property might offer a good return on investment.
4. Invest in precious metals
The prices of precious metals like gold or silver usually go down during a recession. You can invest in them because the prices will go up later. If you’re looking to invest in precious metals, you have a few different options. You can start by purchasing gold and silver coins or bars. Another way to invest in precious metals is to purchase stocks in mining companies. This is a more speculative approach, as the success of your investment will depend on the performance of the company. You can also invest in ETFs that track the price of precious metals. This can be a good way to get exposure to the market without having to take on the risk of buying individual stocks.
5. Invest in yourself
Losing your job can be a devastating blow, especially if it happens during a recession. However, there are some things you can do to weather the storm. First of all, you can invest in yourself. Whether it’s taking a class to gain additional skills or knowledge, or simply paying down your debt, making sure you are in a strong financial position can make all the difference.
Another way to ease the sting is to be mindful of your spending on utility bills. There are a number of simple things you can do to lower your energy consumption and save money. For example, during the daytime, open blinds and curtains to let in natural light instead of turning on lights.
Bottom line
While a recession can be a frightening prospect, it’s important to remember that not all recessions are alike. Some are shallow and short-lived, while others are deep and prolonged. And while there’s no surefire way to predict how severe a recession will be, there are steps you can take to protect your finances and help you stay relaxed.
If you’re investing for the long term, for example, for retirement or moving abroad you shouldn’t panic if a recession is on the horizon. Instead, you may want to take some profits off the table and move to cash equivalents, such as money market funds or short-term bonds. This will reduce your exposure to riskier investments and ensure that you stay afloat during the time of economic crisis.
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