How to Invest During a Recession: Guide for Tradies and Investors
As soon as some investors hear words such as recession or economic downturn, their fears kick in.
Declining stock prices will see many investors not wasting a second pulling their money out of stocks and reallocating it to bonds because bonds are an extremely low-risk investment.
Unfortunately, this move is not altogether the smartest way to invest during a recession.
Investing During A Recession
While investors avoid losing a lot of money by reallocating their funds to bonds during a recession, they are not profiting either. Investing in bonds kills the whole idea of making money.
So, what should investors do then? They could use the following ways to invest during a recession instead of simply reallocating funds to low-risk investments.
Determine the Amount of Risk That You Will Realistically Take On
Your risk profile will determine your appetite for high-growth/high-risk investments. Your age too will be a factor -for example, you should have a small number of high-risk assets in your portfolio if you’re nearing retirement. On the other hand, you can take on more high-risk investments if you’re in your 20s.
Invest in Stocks of the Core Sectors
It is easy to ditch stocks during a recession. However, experts recommend avoiding equities during an economic downturn is not a good idea. While the rest of the economy is going through a topsy-turvy time, some sectors continue to grow despite the recession and, as a result, ensure steady returns for investors.
Therefore, if you want to protect and grow your investment portfolio during a recession without ditching stocks, you should contemplate investing in stocks of core sectors such as consumer goods, utilities, and healthcare.
Recession or no recession, people will continue to spend money on food, electricity, household items, and healthcare. It means that, as mentioned above, sectors will continue to be profitable and, in turn, will continue to provide their investors with an investment payout.
Diversify Your Portfolio
Diversifying your portfolio is an excellent way to minimize your investment risk, including during a recession. Diversifying your portfolio means having a combination of stocks and bonds in your investment portfolio.
While a certain amount of risk is associated with stock investments during a recession, this is compensated by the high expected returns. On the other hand, bonds provide a minimal return, but they are a low-risk investment and thus make your investment portfolio less volatile.
The lure of significant returns on stock makes many people make bad investment decisions. For example, some people invest all their money in a single inventory with massive returns. It is a big mistake since they could go bankrupt if the company offering the stock went bust.
The best way to avoid this is by diversifying your portfolio. A wide range of asset classes should make up your investment portfolio, including bonds and stocks. It will help you lower your investment risk during a recession.
Invest in Real Estate
As seen during the Global Recession of the late 2000s, one of the sectors can suffer significantly from a recession in real estate. While the recession is bad news for real estate investors who’ve made investments in real estate before a downturn, it can be an excellent opportunity for future investors to earn a steady income.
If you’ve been either saving or selling non-income-producing assets, you’re poised to buy investment property when the recession or economic downturn bites. How low real estate prices drop in a recession is similar to the drop in prices of cars. Therefore, a 10% drop in the sales price of a vehicle tells a similar story in property sales.
For tradies, and farmers they’ll be watching out for deals on Utes like Isuzu D-MAX during a recession, and investors will be eyeing up property deals.
As for the house/property purchase, you can rent it to a reliable tenant and earn a steady rental income. Cash flow is king, especially in a recession. Plus, if being a landlord is not for you – when the property cycle returns to a boom phase and property prices go up again, you can sell the house for a profit.
Not a bad outcome if you consider you get the best of both worlds — i.e., you have an income from the rental and then a chunk of profit from the property sale.
Continue Contributing Money towards Your Investments
Even when a recession hits the economy, you should not stop making money contributions to your investments.
Contribute as much to your assets as you can realistically afford. If you don’t do this, you will have financial problems when you retire. Sadly, this is the situation of many Australians today, as most people are not saving enough for retirement. It is in your interest not to follow the herd and regularly add money to your investments.
One of the trickiest times to invest is during a recession. It is because markets constantly fluctuate during a recession, and you’re never sure how a market will behave on a particular day. It increases investment risk significantly, and people are left wondering where to invest their money to minimize loss and earn a profit.
The good news for all such people is that we have identified the above five ways to reduce their investment risk during a recession to avoid going bust.