Given the extraordinary global circumstances, many investors are now fearing that another recession is afoot. It makes sense, as recessions are often the result of an abrupt drop in spending, although most causes of recessions cannot be predicted in advance.
Before such a circumstance is certain, it’s a good idea to plan ahead and decide on your investment strategy now. A recession doesn’t have to mean that all investments should be put on hold; it just means that different industries and types of companies and investments are safer than others. Here are some quick tips to keep in mind.
1. Low-risk investments only
A recession is not the time to experiment or take risks with your investments. The most important aspect of anyone’s recession-time investment strategy should be playing it safe. This involves avoiding investments in companies that are highly leveraged or speculative. Focus on finding companies with good cash flow and low debt for the safest investment options. And as a general guideline, try not to take any major risks at an already uncertain time.
2. Investing in consumer staples in the equity market
When looking for safe investment options in the equity market — in accordance with the previous point — it’s a good idea to focus on consumer staples, or essential items that people will need (and buy) regardless of their financial situation. They typically include food, beverages — including alcohol — certain household goods and tobacco.
3. Focus on non-cyclical, recession-resistant industries
Cyclical goods and services are best avoided during times of uncertainty. They’re the non-essential things that consumers will spend money on less regularly, perhaps influenced by time of year, current economic status of a typical household and a number of other factors.
During a recession, it’s best to focus on finding non-cyclical industries offering goods and services that are in constant, year-round demand. In addition to the consumer staples mentioned above, these recession-resistant industries include grocery stores, discount stores, alcohol manufacturers, cosmetics and funeral services.
4. Ensuring sufficient diversification
The old saying about not putting all your eggs in one basket comes to mind. A good general piece of investing advice is not to pile into a single sector, even when it includes the aforementioned consumer staples.
This is doubly important during as unpredictable a time as a recession. Diversifying across industries will protect you from greater losses if a particular product or industry loses value. Equally important is diversification across asset classes, e.g., equities, in addition to fixed income and commodities.
5. Investing in real estate
Though a major recession can bring serious loses to many industries, real estate — provided wise investments are made — is usually not among them. Recession usually leads to a drop in home values, meaning that you may be able to buy a property at a lower price and sell it for a large profit when prices rise back up after the economy and markets have recovered. In the meantime, you can rent the property out to a tenant, generating reliable passive income during the interim period.
6. Dividend stocks
Dividend stocks create a passive income. After investing in a company, you essentially receive a portion of the company’s earnings.
It’s generally recommended to look for companies that have low debt-to-equity ratios. Just to be completely on the safe side, you may want to focus only on fully reliable companies, i.e. those that have increased their dividend payouts for at least 25 consecutive years.
7. Precious metals
In the commodities market, gold in particular is widely known for retaining its value during periods of uncertainty and recession. Silver tends to perform fairly well during recessions, too, and precious metals in general are a relatively safe investment option.
Be well, and invest wisely.