Published by FrankNez team.
A recession is no friend of an investor.
It can wreak havoc on portfolios, leaving even the savviest investor struggling to recoup losses.
But don’t despair – there are ways to protect your portfolio and even grow your investment during a recession.
The key to investing during a recession is minimizing the risk of an investment’s price falling during that time, maximizing the long-term gains by buying the dip, and creating a fixed income source to cover expenses.
Here are 6 ideas on how to do that.
1. Move to Highly Liquid Markets
It’s better to beef up cash reserves and cut back on discretionary spending during a recession.
This will help you weather any unexpected financial challenges that may come your way and give you more flexibility when it comes to investing.
Some experts recommend having at least six months’ worth of living expenses in cash, but during a recession, it’s even more important to have a bigger cash cushion.
However, the problem with converting your investments into cash in a haste is that you might sell them prematurely.
To avoid this, it’s important not to convert all of your investments into cash, but rather to re-position some of them in highly liquid investment markets like short-term government bonds and money market mutual funds.
This way, you can still access your money if you need it, but you won’t be sacrificing all of your potential earnings.
If this makes you think that moving your investments to the Bitcoin market might be a good idea as it’s a highly liquid market, then you couldn’t be more wrong.
The Bitcoin market is one of the most volatile markets, and it’s highly unlikely that in a recession Bitcoin would retain its value.
2. Invest in Defensive Sectors
Certain sectors are less impacted by economic recessions than others.
These are typically referred to as defensive sectors, and they include healthcare, consumer staples, and utilities.
Healthcare companies, for example, continue to see profits even during tough economic times because people still need to go to the doctor and buy prescription drugs.
And while people may cut back on other discretionary spending during a recession, they typically continue to spend on essentials like food and household goods.
So, investing in defensive sectors is one way to minimize the risk that your investments will take a hit during a recession.
Of course, no sector is completely recession-proof.
But these sectors tend to be less impacted by economic downturns than others, making them a good choice for investors who are looking to protect their portfolios.
3. Do Dollar-Cost-Averaging (DCA)
Dollar-cost averaging is an investing strategy where an investor buys a fixed dollar amount of a security at fixed intervals.
This strategy can be used to buy stocks, bonds, and other securities.
The benefit of dollar-cost averaging is that it takes the emotion out of investing.
When the market is down, it can be difficult to stomach buying more of a security that has lost value.
But if you’re investing a fixed amount each month, you’ll buy more when the price is down and less when it’s up.
Over time, this will average out to a lower cost per share.
Dollar-cost averaging is a good strategy for investors who are looking to buy the dip during a recession.
By investing a fixed amount each month, you’ll be able to take advantage of lower prices and maximize your long-term gains.
4. Consider Fixed-Income Securities
Fixed-income securities are a type of investment that pays a fixed rate of interest.
Common examples include bonds and certificates of deposit.
Investing in fixed-income securities is one way to create a fixed income stream during a recession.
This can provide some stability for your portfolio and help you weather any market downturns.
But it’s important to remember that fixed-income securities are not without risk.
If interest rates rise, the value of your securities will fall.
Nonetheless, if you’re looking for a safe investment during a recession, fixed-income securities may be a good choice.
5. Invest in Real Estate
People have little money to spare during a recession.
They avoid making unnecessary purchases that can drain their bank account — for example, upgrading their house.
This results in a low demand in the real estate market.
However, this decrease in demand is usually short-term and is followed by an increase in the long-term.
This means investing in real estate can be a good way to profit from a recession.
By buying property during a downturn, you can get a good deal on a property that will likely appreciate in value over time.
Just be sure to do your research and only invest in property that you think will be a good long-term investment.
6. Avoid Investing in Highly Leveraged Companies
Leverage is the use of debt to finance investments.
A company that is highly leveraged has a lot of debt relative to its equity.
Highly leveraged companies are riskier than those with less debt because they have less financial flexibility.
If their business hits a rough patch during a recession, they may not be able to make their debt payments, which can lead to bankruptcy.
The Bottom Line
Investing during a recession can be a great way to profit from lower prices and generate long-term gains.
But it’s important to remember that there are risks involved.
Be sure to do your research and only invest in assets that you’re comfortable with.