What Are The Best Ways Of Investing In A Recession?
As inflation is rising, the stock market is falling, and GDP is in the red, experts are debating whether the United States has entered a recession.
In this situation, you may wonder what you can do now to best position your investments to weather the economic storm.
If you make the right investment decisions, you can effectively secure your and your family’s financial future.
Here’s what you should know about investing during a recession.
Should You Be Investing in a Recession?
It may seem counterintuitive, but a recession can be one of the best times to invest because stock prices typically fall during this period.
When the stock markets crash, you can buy stocks in fundamentally sound companies at lower prices. That means bonds, stocks, and mutual funds are likely to be less expensive than they were during the bull market.
What Are the Best Investments During Recession?
Here are the best investments to consider during a recession.
1. Dollar-Cost Averaging (DCA)
It may be sensible to continue contributing to a 401(k), an individual retirement account (IRA), or a non-retirement account during a recession.
Dollar-cost averaging allows you to consistently invest the same dollar amount regardless of whether the market is trending up or down. As a result, you would purchase more shares of a stock when it was cheaper and fewer shares when it was more expensive.
2. Reliable Dividend Stocks
Buying stocks during a recession, especially dividend stocks, can be a great way to generate passive income for you.
Some experts recommend looking for companies with low debt-to-equity ratios and strong balance sheets when comparing dividend stocks.
Aside from providing consistent income, many dividend-paying stocks are in defensive industries that can weather economic downturns with less uncertainty.
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3. Investing Based on Your Goals
Your goals should heavily influence your investing practices, especially during hard times.
A 529 plan, for example, is usually your best bet if you’re saving for your children’s education to secure their future, especially during a recession.
While a regular brokerage account is an excellent place to slowly grow your wealth to fund long-term goals, saving for retirement in a 401(k) or Traditional or Roth IRA will provide tax advantages you won’t find elsewhere.
4. A Diverse mix of Stocks
Consider a variety of stocks to invest in during a recession, which helps mitigate risk.
Going with exchange-traded funds (ETFs) and low-cost index funds, which can contain hundreds of different stocks, also allows you to diversify and balance risk, increasing your chances of benefiting from a market recovery.
5. Value Stock Funds
This is a great option for people who don’t want to or can’t invest much money during a recession. These funds invest in value stocks, which are less expensive than others in the market.
Value stock funds could be a good choice and appropriate for investors comfortable with the volatility of stock investing.
Investors in stock funds must also have a longer investment horizon, at least three to five years, to ride out market fluctuations.
Value stock funds are safer than other types of stock funds because of their low cost, but as they are made up of stocks, they fluctuate much more than safer investments like short-term bonds.
6. Money Market Mutual Funds
Money market mutual funds invest in short-term securities such as overnight commercial paper.
Even the best money market funds typically offer low yields—the best are above 2% as of mid-September 2022, which still beats the average savings account APY.
Unlike Treasury securities and corporate bonds, money market funds provide investors with absolute liquidity: there is virtually no volatility, and you can withdraw your money anytime.
This can be a good option for investors who have the possibility of needing money urgently at any point in time.
Do note that many banks offer money market mutual funds.
If you don’t have a brokerage account or don’t want to open one, you may be able to invest in money market funds through your bank.
What’s the Best Strategy for Investing In a Recession?
During a recession, investors must take caution while remaining on top of the market landscape for opportunities to acquire high-quality assets at bargain prices.
The worst-performing assets in a recession are highly leveraged, cyclical, and speculative. Companies that fall into any of these categories can be risky for investors due to the possibility of them going bankrupt.
On the other hand, investors who want to survive and thrive during a recession should invest in high-quality companies with solid balance sheets, low debt, good cash flow, and industries that have historically performed well during difficult economic times.
Keep a Long-Term View While You Are Investing In a Recession
If you invest in stocks or mutual funds, you will likely not need to withdraw from your account(s) for at least five to ten years. As a result, you shouldn’t be too concerned about short-term market fluctuations.
If you access the funds sooner during a recession, such as to pay for your child’s education in the next year or two, you risk depleting your savings if you withdraw money when the stock market is down.
Setting aside money for the first few years of retirement, college, or an emergency fund can provide you with cash when needed, allowing you to avoid market fluctuations.
Can I Use My Investments If I Have a Debt To Pay During a Recession?
During a recession, many people accumulate debt and make hasty decisions to repay it. Some people even use their investments to pay off debts.
It may seem logical to use your investments to pay down high-interest debt, but there is more to consider.
Instead of using your investments to pay off your debts, consider options such as payday loan consolidation. The process of combining several existing loans into a single new personal loan that you repay in monthly installments at a lower interest rate is known as payday loan consolidation.
Conclusion: Investing in a Recession
Certain investments have performed similarly in previous recessions.
However, no one can predict what will happen in the market soon. Stock prices can fall dramatically in one month, then rise the following month, only to fall again the next month.
Because no one can predict what the stock market will do or how people will react in the short term, it is prudent to stick to your strategy of investing in a recession to participate in the recovery.
Author Bio: Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a Principal Attorney.