The recession alarms have been sounding lately due to a substantial rise in inflation and a similarly sharp downturn in the stock market.
And investing during a recession can be frightening if you don’t know what you’re looking for.
This article explains five things to invest in when a recession hits.
What is a recession?
A recession is a significant decrease in economic activity that lasts for months or even years. Experts proclaim a recession when a nation’s economy sees negative gross domestic product (GDP), increasing levels of unemployment, declining retail sales, and contracting measures of income and manufacturing for an extended time.
It’s also an inevitable component of the economic cycle or the regular cadence of expansion and contraction in a country’s economy.
As unemployment rates climb during a recession, you can lose your job. Because more individuals are unemployed, it becomes much tougher to obtain a job replacement, in addition to being more likely that you would lose your existing one.
Those who keep their positions may experience pay and benefit reductions and find it challenging to negotiate pay increases in the future.
A recession can also cause investments in stocks, bonds, real estate, and other assets. Business owners may also have lower sales and be forced into bankruptcy.
Things to Invest in to consider if a recession happens
1. High-yield savings account
High-yield savings accounts provide interest rates significantly more than conventional savings accounts’ national average.
It functions similarly to conventional savings accounts aside from the greater interest rate. You deposit into the account, and the bank rewards you by giving you interest.
You can withdraw money whenever necessary, but your bank might charge you a fee if you take more than a set number each month.
High-yield savings accounts offer substantially higher interest rates than the national average of traditional savings accounts.
Holding too much cash has its drawbacks. Your savings may be eroded by inflation, and it’s unlikely that you’ll earn enough interest to make up the difference. Therefore, depositing your money in a high-yield online savings account is advantageous.
2. Safe haven assets
A “safe haven” is an investment projected to remain or grow in value during an economic downturn. As they’re not tied to the economy, these assets are considered a safe choice for investors because they would not lose value during a financial crisis.
As a result, safe-haven investment opportunities provide greater security and portfolio diversification for investors, which is useful when the market is erratic.
There are specific characteristics that assets often have that contribute to their reputation as a safe haven, which includes:
- Liquidity: The asset must be instantly and easily convertible into cash.
- Functionality: The asset must have a long-term usage that will continuously generate demand.
- Limited supply: the supply should never increase at a faster rate than the demand
- Demand certainty: The item isn’t expected to be replaced or become outdated
- Permanence: The asset shouldn’t decompose or degrade over time.
However, investors must decide which safe haven is best for the current economic scenario because not all safe havens will possess all of these qualities. Investors must be clear about what they hope to achieve from safe-haven investments because what works well during one market downturn may not perform well during another.
Examples of Safe Haven Assets
Government bonds are a fixed-income financial instrument. They’re issued when a company or the government needs to raise more money. They’re also comparable to loans because investors would loan money to the government, which would then have to repay the investor at maturity.
Government bonds are risk-free investments with low volatility, making them safe-haven assets. This is because investors will receive their main investment and any accrued interest on maturity. Investors also prefer government bonds because they’re thought to have high creditworthiness, which gives investors more security and trust.
Notable currencies that are regarded as secure investments by investors include the Japanese yen and the Swiss franc. Due to their excellent liquidity, independence from other nations, stable political structure, and assurance of backing from a country with promises of strong economic growth, the currencies are attractive investments during a recession.
Defensive stocks are shares of companies that sell products that are considered to be necessities. They’re a part of industries like consumer products, healthcare, utilities, and food and beverage.
Because there will always be a steady level of demand for these products, regardless of economic unrest, they are safe-haven assets. They’re expected to remain stable even during times of economic instability.
3. Diversify your portfolio
Diversification spreads your investments around so that your exposure to any one type of asset is limited. This strategy is designed to help reduce the volatility of your portfolio over time. Balancing risk and reward in your investment portfolio.
According to Anthony Watson, diversification is essential when preparing for a recession.
You can remove company-specific risk by choosing funds over individual companies because you won’t necessarily notice one firm going under among 4,000 others in an exchange-traded fund.
In diversifying your portfolio, try a portfolio of investment pairings that aren’t significantly correlated, meaning where one goes up, the other goes down, and vice versa (like stocks and bonds). This implies that you should consider asset classes and stocks in businesses unrelated to your career or primary source of income.
4. Valuable Metal
When the stock market is falling, and there is general economic unease, precious metals like gold and silver are frequently in demand. This is because they are regarded as a “store of value” or something that investors can physically cling onto while the value of their intangible assets, such as stocks, declines.
Since gold doesn’t offer a dividend, it becomes more appealing when other investments aren’t producing much income. Gold tends to climb when interest rates are low.
And although historically, gold’s value has occasionally been initially reduced at the outset of a recession, it is reasonable to anticipate that, for the most part, it will recover and gain in value throughout the downturn.
5. Invest in yourself
Investing in yourself is one thing you can invest in when a recession hits.
Returning to school to acquire new knowledge or abilities that can help you land a better career is one way to bounce back if you lose your job and source of income during a recession.
It’s easy to forget that what goes up can also fall down. With a recession, severe losses can occur. That’s why the foundation of any investment strategy is knowing how much risk you can take.
Whether it’s imminent or still some ways off, it’s a good idea to get ready for it. Remember that stocks can still perform during a recession; you just need to know which ones.
If you want to know more about how and what to invest during a recession, give us a call today.
Rest assured that someone will get in touch with you and answer all your questions.