Recessions happen. Many predict the world or United States economy may enter one soon. But whether the next significant downturn is six months or six years away, it’s crucial to be prepared from an investment perspective.
Investing during a recession can be one of the best decisions of your financial life, but only if you go about things the right way. For those with plenty of financial breathing room and a long time horizon, market downturns can provide a chance to buy quality investments at deep discounts. Let’s take a look at five of the best choices.
1. Real Estate
Over recent decades, the real estate market and the broader economy have generally gone hand-in-hand, rising and falling together. This means that recessions often provide chances to buy valuable properties far below their true market value. In addition to lower demand for homes, recessions often lead to foreclosures or other situations where homeowners need to get out from under their mortgages quickly.
Investors who are prepared can help these folks out with a quick purchase, knowing they’ll very likely make a significant return from appreciation once the economy is growing again and demand returns. They can also find more rundown properties and renovate them, taking advantage of lower demand for contractors and likely better rates on financing like fix and flip loans. Other investors will keep their new properties rather than plan on selling them in the future, making money on rental income and building wealth as tenants pay down the mortgage. Even those shopping for a personal home will find excellent deals during recessions, allowing them to lock in an affordable place to live for decades to come.
2. Defensive/Non-Cyclical Stocks
Recessions are typically characterized by big dips in the stock market, but not all stocks feel the pain equally. Some companies perform strongly or even thrive during recessions. These can include supermarket chains and discount stores as consumers swap meals out for cooking at home and high-end products for more affordable alternatives.
Utilities are also legendarily stable during all economic climates – we all need to keep the lights on and have running water, right? By the same logic, healthcare stocks also overperform during rough economic environments due to unavoidable and persistent demand. In addition, these companies often have substantial dividends that can provide important investment income during downturns. While they may not fly as high during the good times, those looking for reliable returns during all types of markets should take a closer look at this category.
3. Typical Index Funds
This may seem counterintuitive, but even a regular old index fund tracking the S&P 500 or Dow Jones can be a worthwhile investment to consider during recessions. Think about it like this – if the market was fairly valuing these stocks during typical periods of growth and you know the recession is only temporary (as all are), you’re able to buy the entire market for less than it’ll be worth a few months down the line. Depending on the severity of the downturn and where you are within it timewise, those who can weather the short-term troubles can come out big winners in the long run.
4. Investment Grade Bonds
For those who don’t have the stomach for riding the roller coaster that the stock market can be during recessions, investment-grade bonds and other debt provide a stable source of investment income and a safe place to protect your principal.
While nearly all bonds will pay interest over time and pay off at par value at their expiration, these cash flows are only as good as the company backing them. That’s why it’s critical to stick to highly rated debt, even if it offers a lower return than others. Market downturns often force companies out of business, and bondholders are sometimes forced to settle for just pennies of what their investments were supposedly worth. Avoid this by buying bonds in strong, reliable companies that have weathered past recessions and come out the other side with their credit ratings intact.
5. Commodities
More sophisticated investors may be able to take advantage of big opportunities in the commodities markets during recessions. Commonly traded commodities include precious metals like gold and silver, oil and gas, everyday food products, and other items that sell in markets where one resource closely resembles another. In some cases, investors can take physical possession of their commodities, like gold or jewels.
Others, like oil, timber, or cattle, are mostly traded on paper. Recessions can lower demand for certain products, allowing investors to put their money to work at lower costs. When the downturn is over, these folks can sell back into the market, taking their profits. Timing is more critical with commodities than many other investments, especially those traded on paper or via options. That’s because these contracts typically expire or need to be redeemed at a certain point, and if the economy is still in the tank, investors won’t make any money.
Smart Investors Don’t Need To Fear Market Downturns
All too many people run for the hills at the first sign of economic trouble, essentially hiding their money under their mattresses until things blow over. While it’s an understandable impulse, savvy investors see downturns as just another opportunity. By carefully investing in these five products and having a clear financial plan, it’s easy to come out of the next recession with your investments stronger than ever.