With unemployment low and the economy booming (though perhaps slowing), a recession seems far away. But that boom has led to soaring inflation, and the Federal Reserve has all but heralded a recession by rapidly raising interest rates to stem rising prices. While some investors still see the Fed as on track to fight inflation without tipping the U.S. economy into recession, what’s the best way to invest if the next recession does end up hitting the U.S. economy?
The Best Investing Strategies During a Recession
During a recession, the best investments might not be what you think. Many investors are becoming more conservative, which is wrong because in the long run, the best course of action is to become more aggressive and increase exposure to assets that are likely to provide higher returns.
The rationale is simple: After the stock market falls, investors can buy future growth in these businesses at a lower price. It’s the classic “buy low, sell high,” and everyone knows it, but few do it because fear tends to hold us back during market downturns.
“By the time we know we’re in a recession, stock market valuations may be closer to the bottom than the top — and many times, those markets are already on the way to rebound,” said Ozanne Financial Advisors of Dallas. Financial Advisors President Tyler Ozan said.
“In other words, by the time we know we’re in a recession, it’s too late to flee to safety — and you should be doing it long ago,” he said.
Instead, a recession is a time to prepare for the market rally that will follow. Of course, a recession is not just a downturn in the market. A recession slows the economy, which can leave you out of work and cause other financial difficulties. How do you balance these possible consequences?
Here are four investments to consider during a recession, plus three that are best avoided.
Four investments to consider during a recession
When the market falls, the first instinct of many investors is to get out to stop the pain of losing money. At this moment, the stocks in the market are discounted. For investors who buy stocks at this time, the future rate of return is actually increasing. Good companies can continue to prosper for the next 10 to 20 years, so falling asset prices mean your potential future returns are higher.
So during a recession — when prices are generally lower — that’s when you get higher returns. The following investments may yield higher returns in the future if made during a recession.
stock fund
Stock funds, whether ETFs or mutual funds, are good investments during a recession. Funds tend to be less volatile than portfolios of several stocks, and investors buy them not to bet on a single stock, but on economic recovery and rising market sentiment. If you can tolerate short-term fluctuations, holding stock funds has the potential to achieve higher long-term returns.
Well-diversified funds are great for investors who don’t want the hassle and risk of investing in individual stocks. One suitable option is an index fund based on the S&P 500, a fairly balanced index that includes hundreds of the best companies in the U.S. and has a long-term return of about 10%. Rather than trying to pick a winner, own a small slice of the overall market.
“Investors with a balanced portfolio need to remind themselves that markets always recover from downturns,” said Brooke May, a financial planner and managing partner at Evans May Wealth in the Indianapolis area.
bonus shares
If you want a less volatile portfolio, maybe throw in some dividend stocks. High-quality dividend stocks tend to be less volatile than other types of stocks, such as growth stocks, which means less volatility in your portfolio. Plus, they can offer cash dividends, making sure you’re still cashing in while you wait for the market to pick up.
Feel like you don’t have enough experience to pick dividend stocks? Buy dividend-sharing funds, enjoy the low risk of diversification, and at the same time enjoy stable dividend income. Plus, if you buy when the stock price is lower, you’ll get a higher total yield.
real estate
Real estate can be an attractive investment during a recession for several reasons. First, house prices are likely to be lower than when the economy was strong. Then, when the economy improves and consumers have more cash on hand, your property value could rise.
Second, you can get a better mortgage during a recession because interest rates can be much lower than at other times. You can lock in an attractive monthly payment for decades to come, so even if rates rise later, you still have a below-market mortgage rate.
That’s exactly what many investors have done over the past few years, getting 30-year mortgages at sub-3%. With inflation rising now and in the coming years, they are paying back in cheaper dollars, making property an attractive inflation hedge.
High Yield Savings Account
Cash? Yes, cash is a good investment in the short term, as many recessions usually don’t last long. Cash gives you a lot of options. You can spend it when you need it, say if you lose your job during a recession, cash also allows you to make sure you take the opportunity to invest if the stock market suddenly crashes or you find that perfect house .
But there are downsides to holding too much cash. Inflation will eat your money, and the interest you earn may not keep up with inflation. So, keep your money in an online savings account with a high yield and use it for strategic purposes.
Three Investments to Avoid During a Recession
If you hit a recession, remember to focus on making sure your next investment decision is the right one. Because the market is forward-looking, prices may have dropped a bit before the economy was clearly in recession. As a result, investments that feel safe because prices are stable or even rising may not be particularly attractive options in the future.
bond
In general, bonds tend to be safer than stocks, but it is important to note that there are good and bad times to buy bonds, and these timings are mainly around changes in prevailing interest rates. This is because rising interest rates pull down bond prices, while falling rates push up bond prices. Long-term bonds are more affected by changes in interest rates than short-term bonds.
As investors start to price in a recession, they may flee to the relative safety of bonds. Typically, they expect the Fed to cut interest rates, which keeps bond prices rising. So, entering a recession could be a good time to buy bonds if interest rates haven’t come down yet.
On the other hand, one of the worst times to buy bonds is when interest rates are about to rise. This happened after the onset of a recession. Investors may feel that bonds are safer, especially compared with the volatility of the stock market, but as the economy resumes growth, prevailing interest rates may rise and bond prices will fall.
highly indebted company
May warned: “Highly indebted companies that are more sensitive to high interest rates should be avoided.”
Stocks of highly indebted companies typically fall sharply before and during recessions. Investors anticipate the risks associated with the debt on a company’s balance sheet and lower stock prices to reflect that risk. If a company experiences a drop in sales, as it often does during recessions, it may not be able to make interest payments on its debt and will have to default.
So recessions can be very tough for companies with a lot of debt. But, as Ozan said, if the company survives, it may offer an attractive return. That said, the market is pricing in death for the company, and if death doesn’t happen, the stock price could rise quickly. However, there’s a good chance the company won’t survive, leaving remaining investors with the losses.
High-risk assets such as options
Other risky assets, such as options, are also not recession-friendly. An option is a bet that the price of a stock will be above or below a certain price at a certain time. This is a high-risk, high-reward strategy, but the uncertainty of a recession magnifies the risk of options.
To own options, you not only have to correctly forecast or guess the future movement of stock prices, you also have to accurately predict when that change will occur. If you’re wrong, you could lose all your stake, or be forced to invest more money.
control your emotions
Experts often say that keeping your emotions in check is important during times of market volatility, and the same holds true during recessions. Even the best financial plans can be sabotaged by emotional decisions, and here’s what experts recommend:
• Stick to your long-term plans. “Have a long-term investment strategy or plan and stick to it no matter what the economic situation is,” Ozan said, pointing to the value of diversifying your portfolio, saying it can help investors ride out market turmoil.
• Prepare an emergency fund. An emergency fund can be especially helpful during times of uncertainty in a recession. Not only will it help you weather the storm, it will also help you hold on to your investments and give your investments time to rise again. You don’t want to have to dip into your investments to pay the bills during a recession.
• Don’t watch the market. “If volatility in the stock market keeps you up at night, don’t stare at stock prices every day,” May said.
• More good years than bad. “Historically, the investment market has had far more up years than down years,” Ozan said. “In a recession and correspondingly negative market environment, it’s important to remember that better days for investing may lie ahead.”
• Find a smart advisor. “During this emotional time, having an objective person explain reason, logic and strategy to you can protect investors from making mistakes that could greatly affect long-term investment returns,” Ozan said.
If you are looking for an advisor that will satisfy you, you can follow this link (https://ift.tt/aZJNE1u) to read some advice on choosing an advisor.
the bottom line
The investing experience during a recession can be fraught with worry and anxiety, as markets can be volatile and you’ll want to try to avoid short-term losses. But in the process, you risk hurting your long-term returns. Therefore, it is more important to focus on your long-term plans and the better days ahead when the market improves. Whatever method you use, don’t let your personal emotions influence your decision. (Fortune Chinese website)
This article was originally published on Bankrate.com.
Translated by Agatha
With low unemployment and a booming, if slowing, economy, a recession may seem a ways off. But that boom has led to surging inflation, and to combat higher prices, the Federal Reserve has all but promised a recession by rapidly raising interest rates. While some investors remain hopeful that the central bank can fight inflation without pushing the US economy into a recession, what’s the best way to invest when the next recession does end up hitting the economy?
Best investments during a recession
The best investments during a recession may not be what you expect. Many investors make the mistake of becoming more conservative, when the best long-term course of action is to become more aggressive, ramping up exposure to assets that may offer potentially higher returns.
The rationale is simple: After stocks have fallen, investors are paying a lower price for the future growth of those businesses. It’s the classic “buy low, sell high” that everyone knows but that relatively few can practice because fear so often gets in our way during a market downturn.
“Once we know we are in an economic recession, the equity investment markets are probably closer to the bottom than they are to the top in valuations – and many times those markets are already well on their way in a rebound,” says M. Tyler Ozanne, CFP, president at Ozanne Financial Advisors in Dallas.
“In other words, once we know we are in a recession, it is too late to flee to safety – you should have done that already,” he says.
Instead, a recession is a time to prepare for the ensuing rebound in markets. Of course, a recession is not just a downturn in the market, it’s also a slowing economy that could throw you out of work and cause other financial distress. you balance these potential outcomes?
Here are four investments to consider making during a recession and three that are likely best to avoid.
4 investments to consider if a recession happens
When markets fall, the first response for many investors is to bail out in order to stop the pain of losing money. By discounting stocks in these moments, the market is actually increasing the future returns for investors who buy in. Great companies are well positioned to continue to thrive in 10 and 20 years, so a decline in asset prices means your potential future returns are even bigger.
So a recession – when prices are usually lower – is exactly the time to score higher returns. The investments below offer the potential for higher returns over time if made during a recession.
Stock funds
A stock fund, either an ETF or a mutual fund, is a great way to invest during a recession. A fund tends to be less volatile than a portfolio of a few stocks, and investors are wagering less on any single stock than they are on the economy’s return and a rise in market sentiment. And a stock fund offers the potential for high long-term returns if you can stomach the short-term volatility.
Well-diversified funds are a good option for investors who don’t want the hassle and risks of investing in individual stocks. One sound choice is an index fund based on the Standard & Poor’s 500, a well-balanced index that includes hundreds of America’s best companies and has returned about 10 percent over time. Rather than try to pick the winners, you own a piece of the market as a whole.
“Investors with a well-balanced portfolio need to remind themselves that the market has always come back” from downturns, says Brooke V. May, CFP, managing partner at Evans May Wealth in the Indianapolis area.
Dividend stocks
If you want a portfolio that may be somewhat less volatile, you might want to add some dividend stocks. High-quality dividend stocks tend to fluctuate less than other kinds of stocks (growth stocks, for example), meaning your portfolio will bounce around less Plus, they can offer a cash dividend that ensures you’re getting some income while you’re waiting for the market to turn.
Don’t feel experienced enough to pick your own dividend stocks? Buy a dividend stock fund and enjoy the reduced risk that comes with diversification and still enjoy a solid dividend yield. Plus, if you buy while stock prices are lower, you’ll enjoy a higher total yield.
real estate
Real estate can be an attractive investment during a recession for a few reasons. First, you may be able to buy at a cheaper price than during a strong economy. Then when the economy picks up and consumers are more flush with cash, the value of your real estate may rise.
Second, you may be able to get a much better mortgage rate during a recession, when rates are likely to be much lower than otherwise. You can lock in an attractive mortgage payment for potentially decades, so even if rates rise later, you still have that below-market mortgage rate.
Many investors did exactly this in the last few years, scoring a 30-year mortgage below 3 percent. As inflation rises now and in future years, they’re paying back the mortgage with cheaper dollars, making real estate an attractive inflation hedge.
High-yield savings account
Cash? Yes, cash can be a good investment in the short term, since many recessions often don’t last too long. Cash gives you a lot of options. You can spend it if you need to, for example, if you lose your job during a recession, and it allows you to make an opportunistic investment if the stock market suddenly sells off or you find the perfect house later on.
But there is a downside to holding too much cash. Inflation can eat away at your money, and you likely won’t earn enough interest to overcome it. So, stick your cash in a high-yield online savings account and keep it for strategic purposes.
3 investments to avoid if the market is stung by a recession
If a recession hits, it’s important to focus on making the next right investment decision. And because the market is forward-looking, prices will have probably declined some before it’s clear that the economy is even in a recession. So investments that feel safe – because their price has held up or even risen – may not be especially attractive picks going forward
Bonds
Bonds tend to be safer than stocks overall, but it’s important to remember that there are good times and bad times to buy bonds, and those times are centered around when prevailing interest rates are changing. That’s because a rise in interest rates pushes bond prices lower , while a decline in interest rates pushes bond prices higher. Bonds with long-term maturities will feel the effects of changing interest rates more than short-term bonds will.
As investors start to anticipate a recession, they may flee to the relative safety of bonds. Typically, they’re expecting the Federal Reserve to lower interest rates, helping to keep bond prices up. So going into a recession may be an attractive time to purchase bonds if rates haven’t yet fallen.
On the other hand, one of the worst times to buy bonds is when interest rates are poised to rise in the near future. And that situation occurs in a recession and afterwards. Investors may feel safe with bonds, especially compared to the volatility in stocks , but as the economy returns to growth, prevailing interest rates will tend to climb and bond prices will fall.
Highly indebted companies
May warns, “Companies with high debt loads that are sensitive to higher interest rates should be avoided.”
The stocks of highly indebted companies usually fall significantly before and during a recession. Investors anticipated the risk presented by the debt on a company’s balance sheet, and mark down the stock price to reflect this risk. If the company suffers a decline in sales, which is typical during a recession, it may not be able to pay the interest on its debt and may have to default.
So recessions can be very hard on indebted companies. But, as Ozanne acknowledges, if the company can survive, it may offer an attractive return. That is, the market may be pricing the company for death and when it doesn’t arrive, the stock can rise high quickly. Still, it’s quite possible that the company does not survive, leaving the remaining investors holding the bag.
High-risk assets such as options
Other high-risk assets such as options are not suitable for recessions. Options are a bet that a stock price will finish above or below a certain price by a certain time. They’re a high-risk, high-reward strategy, but the Uncertainty surrounding a recession makes them even riskier.
Not only do you have to correctly predict, or guess, what will happen to a stock price in the future with options, you have to foretell when it will happen, too. And if you’re wrong, you could lose your whole investment or be forced to put up more money than you have.
Keep your emotions in check
Experts routinely point to the importance of keeping your emotions in check during periods of volatility, as often happen during recessions. Making decisions from a place of emotion can derail even the best financial plan, and here’s how experts recommend you deal with it:
• Stick with your long-term plan. “Have a long-term investment strategy or plan and stick with it no matter what the economy is doing,” says Ozanne. He points to the value of having a diversified portfolio, which can help investors weather the market’s turmoil.
• Have an emergency fund. An emergency fund can be especially helpful during the economic uncertainty of a recession. Not only can it help tide you over, but it can also help you stay invested, giving your investments time to rise again. You don’ t want to have to touch your investments in the middle of a recession just to pay your bills.
• Stop watching the market. “If the volatility leaves you up at night, avoid watching values on a daily basis,” says May.
• There are more good years than bad. “Historically, there are way more positive years in the investment markets than there are negative years,” says Ozanne. “In a recession, and corresponding negative market environment, it is good to remember that better investment days are probably ahead.”
• Seek out a smart advisor. “Having an unbiased party speak reason, logic, and strategy in an emotionally charged period of time can save investors from making mistakes that could dramatically affect the long-term impact on their investment outcomes,” says Ozanne.
If you’re looking for an advisor who will do right by you, here’s how to choose one.
Bottom line
Investing during a recession can be a fraught experience because the market can be highly volatile and you’ll likely try to avoid short-term losses. But in the process, you may end up hurting your long-term returns. So it’s important to stay focused on your long-term plan and the better days ahead once the market turns back around. Work to keep your emotions from driving your decision-making in whatever way works best for you.
This article was originally published on Bankrate.com.
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