How to invest during a recession?
Investing during a recession can be tricky, as you cannot predict market patterns. Read on to learn more about how and where you can invest during a recession.
With increasing inflation, confusing movements of the stock market and a GDP with slow growth potential, a recession is nearing. Recessions make you question how you should position your investments to cope with the upcoming economic scenario. Read this article to learn how to invest during a recession.
What is a recession?
A recession is signalled by a substantial and widespread downtrend in economic activity. A decline in GDP or Gross Domestic Product for two quarters in a row typically signals a recession. An economic recession results in reduced output and decreased consumer demand, which raises unemployment rates. Recessions can last for a few months or a few years. The road to economic recovery back to the initial peak can take longer.
Currently, Nigeria is experiencing a projected growth rate of about 3% for the next 2 years. This is subject to external risks as well. Irrespective, the devaluation of the Naira should be enough cause for concern to diversify investments and retain the value of your money.
The value of assets can decline in this economic environment. Thus, it is essential to understand what this means for you, as an investor.
What Does This Recession Mean for Investors?
What are your thoughts? Is it safe to invest during a recession or should you keep a reserve of cash for the tough times that might spring up?
While investing during a recession, be cautious of a few factors to ensure your money does not bear the brunt of the recession's after-effects. Here are a few strategies to keep up with market trends during a recession:
Avoid investing based on the news
Your portfolio may be negatively affected if you make investment decisions based on short-term recession news that has an adverse impact on it. The long-term picture should be kept in mind at all times.
Don't liquidate your investments
Stay invested in a strategy that suits your investor personality to ride out the volatility in the market. Your positions should experience incremental gains when the markets bounce back to normal.
Expand and diversify
Don't put all your eggs in one basket. Diversify your allocations based on long-term goals to ensure you're not over-exposed to one specific market. Ensure you rebalance your portfolio and assess your finances periodically.
Hold your horses!
This is probably the hardest task. Be patient with your money. On average, a recession lasts for ~12 months. Focus on long-term goals regardless of economic contractions to overcome temporary challenges.
Is it safe to invest during a recession?
With an economic downturn, it is natural for the value of stocks and other assets to decline. This is bad news for an existing portfolio. Letting investments be on their own does not correlate to locking in recession-related losses by selling. For some investors, this can be a good time to buy as prices eventually rise during the end of the recession.
How to Invest Wisely During a Recession?
Invest cautiously during a recession under these circumstances:
1. You have enough emergency savings
Your emergency savings should cover three to six months of living expenses. If there is extra money beyond this coverage, you can invest it. If not, build a solid emergency fund beforehand to invest during a recession.
2. You're not going to obsess over your portfolio
During an economic downturn, the stock market shows consistent movement. You may be inclined to check your account every day to understand your portfolio's health. Don't obsess over it, you will risk making rash decisions and panic over the eventual consequences.
3. Leave your portfolio untouched for seven years
Investing during a recession is not for the faint-hearted. You may buy at a low, only to see a stock hit another all-time low. Avoid investing unless you have a long-term strategy in place. The goal is to leave your money alone for at least seven years.
Only invest during a recession if you're confident about your financial position. If you don't have the right confidence or approach, it may fail terribly. Focus on paying your bills and maintaining your health. You can increase your volume of investments over time when you're in a more stable position in life.
Where to Invest in During Recession? Which Sectors Perform Well?
Investing when the economy is in a downturn can be a challenge. There are several ways to invest during a recession that can create additional growth opportunities. Here is a list of places you should explore during a recession for your investments.
1. Stash on cash
If you are unsure of your employment status and investments to make during the recession, build up your cash reserves. In the event of not understanding the markets, it's better to build and sustain your reserves than to act on hasty decisions. Keep a part of your portfolio in highly liquid securities or in cash.
2. Invest in defensive stocks
Consumer discretionary stocks see larger gains when the economy grows. The losses and gains depend on the rise and fall of cycles along with the confidence consumers hold in these companies. Defensive stocks in the utility or consumer staples sector are less susceptible to volatility in a recession, protecting the value of your portfolio.
3. Explore quality assets
Investors should explore quality assets to protect the value of their portfolio. Investing in business ventures that don't depend on economic growth to survive is a smart idea. Companies with high recurring revenue would ideally not see economic downturns. Companies with high debt should be avoided. In case the company decides to refinance, you may have trouble with returns.
4. Avoid growth stocks
Avoid investing in growth stocks during a recession. Consider income-producing or dividend-paying stocks.
5. Dividend stocks.
Dividend stocks act as a cushion for your portfolio during recessions. Dividends are indicators of strength. Even if the company's stock price falls, it will keep paying dividends.
6. Invest in actively managed funds
Shift to actively managed funds and assets during a recession. These funds are actively adjusted for risk and expenses.
Bonds perform well during a recession. Investment-grade bonds should be a target option.
8. Safe Havens
Precious metals like gold, silver and platinum have been viewed as safe havens. Precious metals hold inherent values and provide protection against the effects of inflation.
Investments to Avoid in a Recession
Recessions are difficult to predict and challenging to navigate. Investments that are usually viewed as safe may not be so during a recession.
Read on to learn more about investments you should avoid during a recession.
1. High-yield bonds
High-yield bonds with mediocre credit ratings can be riskier than debt securities. Given market uncertainty, it is advisable to avoid this asset class.
2. Highly leveraged stocks
Companies with large amounts of debt should not be invested in during a recession. The likelihood of failure is significantly higher. If a company defaults on its payments, the stock price can plummet.
3. Discretionary companies
Avoid investing in discretionary stocks during recessions. These companies may be popular during a bull run but become susceptible to lose with consumers having less money to spend.
4. Speculative assets
Speculative assets with high risk and high rewards should be avoided. Stay away from penny stocks in smaller companies. Speculative assets do not perform well in a bear market.
In the advent of a recession, do not pull out all of your investments immediately. A decline in the value of assets and stocks could mean that your chance to fulfil long-term investments is here, by virtue of discounted prices.
Keep a firm count of what you should keep and what you can let go of.
During a recession, your short-term goal should be capital preservation in your portfolio. Investing, in the long run, will bring you success. Explore high-quality investments and avoid speculative assets and investments. Treasuries and bonds can prove to be more stable.
Ensure you don't cash out on quality investments during a recession. Avoid high-yield bonds and highly-indebted companies to maintain a healthy portfolio and avoid unperturbed risk.
1. What Kind of Recession Will It Be Next?
There are multiple signs that indicate that we are heading into a recession. Of course, this won't be like the recession we saw in 2008. Several market factors play a role in understanding when the next recession will happen and what kind of recession is coming our way.
2. Should you invest in dollars during a recession?
Yes, saving in dollars for Nigerians can provide protection against the fluctuations of the Nigerian Naira.
4. Is 2023 a recession?
While several countries across the globe are experiencing a downtrend in their GDPs, as of 2022, we're not in a global recession.
5. How long do recessions typically last?
Recessions typically last anywhere from 2 months to 18 months. The average recession cycle lasts about 10 to 11 months.
6. Is it wise to have cash during a recession?
Yes, it is essential to have cash during a recession. Ensure you keep money in an emergency fund for at least three months to cover your expenses. Hold back on discretionary and non-essential purchases.