Making Secure Investments in a Recession
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While most people think about pulling back and maximizing liquidity during economically challenging times, it pays to be on the lookout for investments that might not be as attractive (or as affordable) when the economy is hotter. Certain approaches to investing in a recession are tried and true. Others require a bit more creative thinking and a willingness to take a risk.
Here are some basic principles for choosing recession-proof investments and prospering even when times are tough: |
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Don’t Get Scammed
The first and most important rule of thumb should be, if something sounds too good to be true, it probably is. Recession brings out scammers who prey on fear and encourage people to dump sound investments in exchange for bad ones by promising ridiculously high returns. If someone approaches you with a promise that sounds ridiculous, don’t bite.
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Stick with the Winners
Certain companies are golden and seem to do well no matter what the economic conditions. Companies like Cisco, Apple, Microsoft, Hewlett-Packard, Google, Berkshire Hathaway, IBM, and Intel, all have huge cash reserves that allow them to weather just about anything. If you are able to invest in them, now is a good time to do so. |
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Invest in the Bargain Masters
Saks doesn’t do well when times are tough, but WalMart does. Companies like Dollar General that offer deep discounts during hard times are a better bet than companies that offer high end merchandise. |
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Use the 20 Year Rule
During a recession, people avoid buying stocks for fear of losing money on their investments, but prices are usually low during hard times, and “buy low, sell high” is still the best caveat when it comes to investing. Ask yourself who will still be in business in 20 years. Coca Cola? Procter and Gamble? This single question can help to clear your mind so you can make sound decisions on what to buy. |
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Take a Look at Energy
Many analysts are predicting that alternative energy will actually evolve into the next “bubble” once the current recession ends. While no one wants to see another bubble, investing in alternative energy now, while prices are low, could result in a big return down the line. |
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Diversify
The temptation during a recession is to put everything in one basket in order to either stay safe or maximize profit. But if you invest everything where you can’t lose it, you stand to miss out on return. If you invest everything in what promises high return, you risk too much. Continue to diversify your investments just as you did during better times, but increase your liquidity. |
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Sin, Health Care, and Utilities
As the saying goes, ‘sin is always in’, and people will also always need health care and lights. Investing in sin (i.e. casinos, tobacco, and liquor), health care, and utilities, even during a recession, is widely considered to be a fairly safe bet. Stocks go up and down, but regardless of current volatility these are all areas that tend to perform reliably over time. |
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Increase Liquidity
If you don’t have at least three to six months of take-home pay saved in a liquid account, now is a good time to start saving. The biggest recession threat for people who are still working is job loss. Divert some of the contributions you make to your 401k or use for investment to a liquid account so you don’t have to cash anything in should you be laid off or terminated. |
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Act Sensibly
Every economic downturn presents challenges and opportunities. The most common investment mistake people make during a recession is to react instead of act. Don’t take all your money out of your 401k and put it in gold or in a jar in the backyard. Don’t be persuaded to do radical things you’d never consider during better times. |
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Conclusion
You can always find safe investing opportunities in a recession by staying calm, thinking things through, diversifying your portfolio, and increasing your liquidity as a hedge against job loss. You can also benefit from an economic downturn by identifying and investing in companies that actually are energized by hard times.
By keeping your wits about you, refusing to panic, buying low when something looks good, and keeping most of your money invested in a diversified portfolio of recession-proof stocks, you can and will weather the current storm and maybe even benefit from it. |
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