5 Tips For Investing During A Recession

There is currently a lot of debate surrounding whether the US is in a recession. Experts like Elon Musk claim that the recession has begun. Other experts are waiting for further data, but predict that if we are not in a recession, we soon will be. As such, it is important to make preparations to get through a potential recession.

If you have money invested, or are planning on investing large sums of money, you may be unsure about what course of action to take. By definition, growth is down or negative during a recession. Can you actually make good investment decisions or is it about finding the best case scenario?

The good news is that there are ways to invest successfully in the face of a recession. Here are 5 important tips for investing during a recession.

1. Keep cash or liquid reserves

There are a number of reasons to keep cash reserves during a recession. The most basic reason is so that you have funds to fall back on no matter what happens. You may lose your business or your job and have to rely on these funds.

But another reason has more to do with the security inherent in cash reserves. When you have your money in cash or in a safe, highly-liquid account like a money market mutual fund, you know it is not going to lose value. While investments can crash, losing you a lot of money, cash will hold its value.

That being said, you should not panic and sell off your investments for cash. Panic selling is never a good idea, and you should not keep all of your money in cash as markets will rise again.

2. Buy defensive stocks

Of course, the advice to sell volatile stocks is not particularly insightful. After all, these are the stocks that are likely to crash hardest during a recession. But where should you put that money? Defensive stocks are great to own in a recession.

What are defensive stocks? These are stocks that are non-cyclical, in that they are fairly consistent no matter what is going on. Utility stocks and consumer staples stocks are the most common examples of stocks that keep their value. Companies selling these essential services will continue to succeed even when other consumer goods providers are struggling.

3. Consider buying quality assets

Quality assets are also likely to survive fairly well during an economic downturn. These are asset classes that come from businesses that are not dependent on economic growth for survival. For example, a company with high recurring revenue, such as memberships or subscriptions, are more resilient during recessions.

If a company has high debt, however, this could lead to bad decision-making on their part and cause them issues during the recession even though they should be better-placed to survive.

4. Invest in dividend stocks

Dividend stocks are a great cushion for any investment portfolio during a recession. This is because even companies with falling stock prices usually continue paying dividends. These dividends will not make you a lot of money, but they will keep your investment growing during the toughest economic times.

5. Investment-grade bonds

Bonds are always considered one of the safest investments. You should certainly consider buying bonds during a recession, especially if they are government-secured. Considering the high benchmark interest rate, you may get good returns on long-term bond investments.

Don’t make panicked decisions

One of the most important tips across the board is to avoid making decisions based on panic. It may be that your panic is justified. However, you are unlikely to make any good decisions out of pure fear. Take a moment to breathe before selling off your investments or liquidating your assets.

The good news is that, while a recession may be in progress or on the way, it is unlikely to be as bad as previous recessions. The β€˜90s recession was caused by the dot-com bust. The Great Recession was spurred by the housing bubble bursting. In 2022, it is very specific conditions that are potentially causing a recession. These things, including major supply chain issues and inflation, are temporary and will eventually pass.

As long as you can survive throughout the toughest parts of the recession without panicking, you may be in a good position with investments that have not collapsed.