Rounding it up
Investing during a recession isn’t necessarily any riskier than any other time.
Diversifying, gauging risk, and making shrewd investments based on age can help keep you on the straight and narrow.
Consumer staples, financial institutions, and healthcare companies tend to weather recessions well.
Items consumers can cut from their everyday spending, like nonessentials, fare poorly.
Investing in the market can be a fun and profitable part of your financial strategy. We are, however, in a rather unsettling economic period. Inflation is causing prices to creep up, jobs -- when available -- aren’t keeping pace with the salaries required to offset rising prices, and credit is getting more expensive.
So, you might be asking yourself if it is in any way safe to actually invest during a recession. After all, if the market keeps tanking, won’t you just lose money?
Not necessarily. It can be safe to invest during a recession. Sure, some investments can get a bit riskier, but there's also a wealth of opportunity when you’re investing while the market is down.
After all, you’re buying low! Read on to learn more about investing during a recession, what you need to do to protect your investment. Toward the end, we’ll check out some other “investments” you can take on.
Investing is always risky
This is the number one thing to take away from this article. Whether the market is booming or busting, technology is high or low, or commodities rule the day, investing is always risky. No matter what you do to prepare, there is a chance that you could lose a lot of money. That’s just the nature of investments and is the reason why investment companies, stock markets, and other financial institutions always have those long disclaimers warning of the risks that come with investing.
And yet, people still invest – a lot, in fact. Why? Well, there’s money to be made, and investing is an excellent way to save for a variety of different things, such as large purchases and retirement. But if it’s so risky, you may wonder how people mitigate that risk.
But is it safe?
With this in mind, investing has inherent risk regardless of the climate—but it can be safe to invest during a recession as long as you adhere to a few key rules and understand some investing basics.
Diversification is the key to mitigating the risk you face when you invest your hard-earned dollars and cents on the stock market. It’s a fancy word for ensuring you buy a lot of different kinds of stocks and bonds. An old saying works well here: “Never put all your eggs in one basket.” The same is true of investing. Sure, Apple may be doing great, but what happens if you put all your money into Apple stock and, suddenly, the iPhone becomes obsolete? You’re going to be out quite a bit of money!
A properly constructed portfolio has a number of different assets from a number of different sectors. Invest a little bit in energy, a bit in healthcare, and a bit in technology. Protecting a portion of your investment with safer investments, like bonds or mutual funds, can also help keep your portfolio well balanced. By diversifying, you are ensuring that your entire investment doesn't go down the tubes if one sector or group of companies ends up taking a nosedive.
Everyone's a little bit different. If you’re single and in a secure, well-paying job with a decent income, you may be more willing to gamble with your money. If, however, you have a family to take care of and a mortgage, you might not be as willing to invest money that you know you might lose, despite the fact that you might be able to significantly grow your investment. You should sort out your risk tolerance before going anywhere near a brokerage. Risk management should be your guiding principle, above all things.
Good money after bad
Make sure you go into your investment strategy with an understanding of exactly how much money you have (and want) to spend (or risk). There may come a time when your buddy tells you about a great little stock that’s about to pop.It can be tempting to bite on these kinds of things, over extending what you’ve already planned to invest. Tread carefully or you’ll be tossing in more money than you want.
If you’re young and spry, with your whole life ahead of you and very few, if any, pulls on your financial life, you’ll likely be willing to invest a bit more and be a bit more risky with your investments. You’ve got more time to run and are able to withstand market fluctuations over a longer period of time.
If, however, you’re approaching retirement age, you probably want to hold onto the money you have as opposed to chasing after profits. If you’ll be retiring in a few years, you wouldn’t want to lose your entire nest egg on a few volatile stocks. Ensuring you understand where you are can help you make the right choice for your investments.
It’s a tale as old as time. You hear that oil output is finally turning positive, gas prices are dropping and consumer spending is on the rebound. Now’s the time to invest! Right? Yes and no. It’s never a good idea to attempt to “time” the market. Sure, you should pay attention to the kind of moves and fluctuations the market makes and act appropriately, but hedging all your bets on the prospect of when something is going to happen in the market is a bad idea. Large, multinational brokerages have artificial intelligence as well as business school graduates and armies of traders analyzing the market, and even they get it wrong sometimes. That being said, you don’t stand too much of a chance of getting it right by trying to time the market.
And the biggest reason…
The biggest reason it might be a good idea to invest during a recession? Stocks are cheap. You might be able to invest in a company or fund that would normally be out of reach for your pocketbook. Recessions provide opportunities for investors to make money when the market does eventually go back up.
Safer & riskier
We’ve talked about ways to ensure you can protect your investments as best as possible during a recession, but there are some specific investments that get safer and others than become riskier as the economy ebbs and flows. When the economy turns downward and recession comes, here are a few investments to keep in mind and a few from which you should steer clear.
You might be taking a look at your credit card bill only to see that your interest rate has ballooned over the last few months because of rising interest rates. Well, the financial institutions that issue your credit cards are authorizing those increases and, hence, collecting additional cash from you, the customer. Now, rising rates does make it a bit more expensive for financial institutions to do business, but that pales in comparison to the profits they make.
Think about the companies that make toilet paper or chicken or bake those stellar cookies you love. No matter what the economy looks like, people will always buy toilet paper, chicken, and cookies. Because some of this stability is baked in, you won’t necessarily see a huge pop when the recession starts to ebb, but your money is more likely to be safe.
The same as consumer staples–everyone needs healthcare. This includes biopharmaceuticals, medical equipment, drugs, and any and all products used at hospitals. These companies tend to do well and have the opportunity to profit when the market turns around as they release new products and drugs to the market.
Funds that track whole sectors or markets do well during recession because they are, by nature, diversified. You can even drill down into these more and invest in specific sectors’ mutual funds. The other thing that makes index funds so attractive is that it takes the guesswork out of picking stocks. Just pay and go.
Consumers will often head for safe-haven assets during recession, and that means cutting costs wherever possible. In general, the automobile sector is one that tends to underperform because consumers tend to hold off buying a new vehicle. Fewer sales means lower profits.
Appliances, technology & retailers
In the same vein, as consumers try to cut household costs, they will likely put off investing in new appliances for the home. Other retailers take the hit as well, including, sales for clothing, shoes, electronics, and other non-essential products tend to suffer.
Any company that is highly leveraged–meaning it has lots of outstanding debt as it relates to cash–can be a dangerous investment during a recession. As interest rates rise, these companies’ interest rates rise as well, making debt more expensive. Just picture what your own finances would look like if you were deep in debt and the interest rate kept spiking.
The best way to invest during a recession?
The best investment you can make is the one you make in yourself. If you’re underemployed or always dreamed of beginning a second career, a recession can be a perfect time to head back to school, learn a new skill or switch careers. Investing in yourself can increase your overall purchasing power.
If you have the capital to spare, consider taking a six-month course on IT and earning a certificate. In some cases, employers will pay for courses and career development opportunities like these when they may not have additional cash to offer raises or bonuses. This is especially true during recessions.
You can invest safely during a recession as long as you understand which investments get riskier and which get safer. Moreover, investing in yourself can bring the greatest return.
Dan is a runner and writer living in the Washington, D.C. area, where he currently works for a financial services trade association as the Communications Director.