Recession Investing

When making an investment you cant worry about the price of the stock you buy right now, but the price of what the stock is going to be within 10 years. The patience required for investing is a critical part of financial discipline and shows how well you can check your emotional state, greed, and manage money to achieve your goals. Being patient with your investment means that once you have selected the asset to invest in, you should not be worried by short-term volatility in the value of the investment and stay invested for the long-term. The idea here is to select worthy assets at a reasonably good price. Warren Buffet states “A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.”  Investment Opportunites are around all the time if you are looking for them and welcome the risk it presents. A recession can be the best possible time to begin investing in stocks because the prices of assets often are underpriced or “on-sale”. You could pick up stocks, bonds, mutual funds and more for far less of the price they would have cost in the previous years. Other investors dump their assets, which gives you a great opportunity to step in and purchase a great company for a fraction of the value. All of this is important when it comes to long term investment because people who try to time the market often fail to do it at the right time and end up losing money.

What is a Recession?

A recession is a period of decline in economic activity. Accord to the  National Bureau of Economic Research a recession is defined as a period of falling economic activity spread across the economy, lasting more than a few months. They are also a period of temporary economic decline when global trade and industrial activity are reduced. Recessions are recognized when there is a fall in GDP in two successive quarters. There have been 47 recessions within the U.S since the articles of confederation, and only 13 since the great depression. Recessions are a normal part of a business cycle, and it takes the excess goods out of the economy while balancing economic growth. Recessions are also a great opportunity to purchase assets because they are usually cheap during hard economic times. Since the last Recession, the S&P 500 is up over 250%. Overall, recessions aren’t as bad as people make them sound, they create great opportunities for investors to purchase assets, and they also change consumer behavior in a positive way.

Investment Strategies for a Recession

In a recession, the worst-performing assets are the highly leveraged and speculative stocks. Companies that are in this category are usually growth stocks that can be risky for investors because of the potential chance of bankruptcy. Investors who want to survive and boom during a recession will invest in high-quality value companies that have strong balance sheets, low debt, and steady cash flow. An example of a company that is like this is Proctor And Gamble no matter how the economy is doing people will always be buying their products during a recession or economic boom.

Utility Stocks

Utilities are considered the classic defensive sector as they are made up of staid, slow-growing companies that usually pay higher dividends to attract investors. These companies include water, gas, electricity, and other infrastructure firms. Utilities earn a profit but are public but are a public service which as a result it has substantial regulation. A few solid utility stocks to purchase are Southern Co., Duke Energy Corp, and Oneok. These three companies all have a dividend yield of over 4% and are great assets to own during a recession.

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Gold

During a recession, gold is seen as a better investment than the stock market. Gold’s price directly affects the prices of gold streaming stocks, which outperform the S&P 500 during a recession. When the international financial system is threatened by geopolitical instability, gold provides an excellent anchor for your wealth. During times of economic crisis, gold and other precious metals retain their value exceptionally well and often appreciate in value. There are many different ways to invest in gold but in my opinion, purchasing gold ETFs is the best way to go during a recession, An example of a few gold ETFs are SPDR Gold Trust, Ishares Gold Trust, and Van Eck Vectors Gold Miners. Gold is a great way to hedge against a recession but you have to be aware of high volatility.

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Discount Retailers

As budgets feel the strain of an economic downturn it makes sense that discount retailers like Walmart, Ross Stores. and Dollar Tree Inc. In hard times, however, these retailers excel by going back to core everyday products to give cheap goods to consumers. People may not like discount retailers, but in a recession, most end up shopping there. Walmart’s net income rose in 2008, 2009, and 2010, the toughest years following the financial crisis of 2008. Although the next recession will be triggered by different factors than the last one, discount retailers like Ross, Dollar Tree and Walmart could still be poised to cash-in. With many retailers struggling and some going out of business, These companies to me are considered recession-proof stocks.

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Dividend Stocks

Investing in dividend stocks can be a great way to generate passive income. When you’re comparing dividend stocks, some experts say it’s a good idea to look for companies with low debt-to-equity ratios and strong balance sheets.

If you don’t know where to start, you may want to look into dividend aristocrats. These are companies that have increased their dividend payouts for at least 25 consecutive years.

Two solid dividend stocks for a recession is in companies like Proctor and Gamble and Johnson and Johnson. These companies offer products that are absolute necessities for living and will always be bought no matter what the economy is looking like, they both offer solid dividends and have strong balance sheets.

Conclusion

recession can be the best possible time to begin investing because asset prices often fall hard, meaning you can pick up stocks, bonds, mutual funds, real estate, private businesses, and more for far less than you could just a few years prior. Many people panic during a recession and think the world is ending, Many investors let their emotions cause them to make exactly the opposite buy/sell decision that they should be making at the time. To “be fearful when others are greedy” is not the same as being afraid; it means being skeptical and expanding your required margin of safety. When a recession hits make sure to have cash ready to get solid companies at a discounted price.



Categories: Investments

1 reply

  1. Great tips!!

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