Source: Property Talk
As soon as investors hear words such as recession or economic downturn, their fears naturally kick in. However, they still wait for news about declining stock prices to come in. When this happens, most investors do not waste a second to pull their money out of stocks and reallocate it to bonds because bonds are an extremely low-risk investment.
Unfortunately, most people don’t know how to invest during a recession.
Investing During A Recession
While investors avoid losing a lot of money by reallocating their funds to bonds during a recession, they are not profiting either. It kills the whole idea of making investments.
So, what should investors do then? They should use the following ways to invest during a recession instead of simply reallocating funds to low-risk investments.
Determine the Amount of Risk That Your Realistically Take On
You need to consider three things to arrive at the risk that you can realistically take on: your job security, investment horizon, and behaviour toward risk. For example, you should have a small number of high-risk assets in your portfolio if you’re nearing retirement. On the other hand, you can take on more high-risk investments if you’re in your 20s.
Invest in Stocks of the Core Sectors
It is easy to ditch stocks during a recession. However, experts recommend that avoiding equities during an economic downturn is not a good idea. While the rest of the economy is going through a topsy-turvy time, some sectors continue to grow despite the recession and, as a result, ensure steady returns for investors.
Therefore, if you want to protect and grow your investment portfolio during a recession without ditching stocks, then you should contemplate investing in stocks of core sectors such as consumer goods, utilities, and healthcare.
Recession or no recession, people will continue to spend money on food, electricity, household items, and healthcare. It means that the above-mentioned core sectors will continue to be profitable and, in turn, will continue to provide their investors with an investment payout.
Diversify Your Portfolio
Diversifying your portfolio is always an excellent way to minimize your investment risk, including during a recession. Diversifying your portfolio means having a combination of stocks and bonds in your investment portfolio.
While a certain amount of risk is associated with stock investments during a recession, this is compensated by the high expected returns offered by stocks. On the other hand, bonds provide a minimal return, but they are a low-risk investment and thus make your investment portfolio less volatile.
The lure of significant returns on stock makes many people make bad investment decisions. For example, some people will invest all their money in a single stock with massive returns. It is a big mistake since they could go bankrupt if the company offering the stock went bust.
The best way to avoid this is by diversifying your portfolio. It means that a wide range of asset classes should make up your investment portfolio, including bonds and stocks. It will help you lower your investment risk during a recession.
Invest in Real Estate
As seen during the Global Recession of the late 2000s, one of the sectors can suffer significantly from a recession in real estate. While the recession is bad news for real estate investors who’ve made investments in real estate before a downturn, it can be an excellent opportunity for future investors to earn a steady income.
If you’ve been saving up to make investments in real-time for some years now, then you should delay making that investment till a recession or economic downturn takes place. It is because real estate prices tend to drop, similar to the drop in prices of cars.
For tradies, they’ll be watching out for deals on the Isuzu D-MAX during a recession, and investors will be eyeing up property that’s now priced for much lower than the usual market price of times of stability.
For example, if you’ve identified a property in your area that costs $200,000, then the property’s price could drop to $150000 during a recession. If you already have $200,000 in your bank for buying the property, then you can keep the additional $50000 as savings or invest it in other assets.
As for the house/property you buy, you can rent it out to a reliable tenant for a year or two to earn a steady rental income from the property. The recession is likely to end when the tenancy contract expires, and property prices would have gone up once again. You can then sell the house for a profit—this way; you make money from both the rental and sale of the property.
Continue Contributing Money towards Your Investments
Even when a recession hits the economy, you should not stop making money contributions to your investments. Contribute as much to your investments as you can realistically afford. If you don’t do this, you will have financial problems when you retire. Sadly, this is the situation of many Australians today, as most people are not saving enough for retirement. It is in your interest to not follow the herd and regularly add money to your investments.
One of the trickiest times to invest is during a recession. It is because markets constantly fluctuate during a recession, and you’re never sure how a market will behave on a particular day. It increases investment risk significantly, and people are left wondering where to invest their money to minimize loss and earn a profit.
The good news for all such people is that we have identified the above five ways to reduce their investment risk during a recession to avoid going bust.