There is currently a lot of debate about whether the United States is in a recession. Experts like Elon Musk say the recession has begun. Other experts are waiting for more data, but predict that if we are not in a recession, we will be in one soon. Thus, it is important to prepare for a possible recession.
If you have invested or plan to invest large amounts of money, you may not know what course of action to take. By definition, growth during a recession is low or negative. Can you really make the right investment decisions or do you need to find the best scenario?
The good news is that there are ways to successfully invest in a recession. Here are 5 top tips for investing during a recession.
1. Hold cash or liquid reserves
There are a number of reasons why you should keep cash reserves during a recession. The most basic reason is that you have funds to fall back on, no matter what happens. You may lose your business or job and have to rely on these funds.
But the other reason has more to do with the security inherent in monetary reserves. When you have money in cash or in a safe, highly liquid account like a money market mutual fund, you know it won’t lose value. While investments can collapse and lose a lot of money, cash will retain its value.
However, you should not panic and sell your investments for cash. Panic selling is never a good idea and you shouldn’t keep all your money in cash as the markets will go up again.
2. Buy defensive stocks
Of course, the advice to sell volatile stocks is not particularly insightful. After all, these are the stocks that can crash the most during a recession. But where to put this money? During a recession, it is best to own defensive stocks.
What are defensive actions? These are stocks that are not cyclical as they are fairly constant no matter what happens. Utility stocks and consumer goods stocks are the most common examples of value holding stocks. Companies that sell these essential services will continue to be successful even when other consumer goods providers struggle.
3. Consider buying quality assets
Quality assets are also likely to fare well during an economic downturn. These are asset classes that come from businesses that do not depend on economic growth for survival. For example, a company with high fixed income such as memberships or subscriptions is more resilient during downturns.
However, if a company is heavily indebted, it can lead to bad decisions on its part and create problems during a recession, even though they should be in a better position to survive.
4. Invest in dividend stocks
Dividend stocks are a great cushion for any investment portfolio during a recession. This is because even companies with declining stock prices often continue to pay dividends. These dividends won’t make you much money, but they will keep your investment growing during tough economic times.
5. Investment grade bonds
Bonds have always been considered one of the safest investments. You should definitely consider buying bonds during a recession, especially if they are government guaranteed. Given the high base interest rate, you can make good returns on long-term bond investments.
Don’t Make Panic Decisions
One of the most important pieces of advice across the board is to avoid making decisions based on panic. Perhaps your panic is justified. However, it is unlikely that you will make the right decisions only out of fear. Before you sell your investments or liquidate your assets, take a breather.
The good news is that while a recession may be in full swing or on the cusp, it is unlikely to be as severe as previous recessions. The recession of the 1990s was caused by the dot-com crash. The Great Recession was caused by the bursting of the housing bubble. In 2022, very specific conditions could potentially trigger a recession. These things, including major supply chain issues and inflation, are temporary and will eventually pass.
As long as you can get through the worst recessions without panicking, you can be in a good position with an investment that hasn’t failed.
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