It was the best of times, it was the worst of times. The economic downturn had opened up a plethora of investment opportunities for savvy entrepreneurs. I had been following the startup scene for years, and I knew that this was my chance to get in on the ground floor.
I met with dozens of startups, but only one stood out to me. It was a company that manufactured eco-friendly construction materials. They were looking for investors to help them expand their business. I liked what I saw, and I decided to invest in them.
The company took off like wildfire. Within a few years, they were one of the leading manufacturers of eco-friendly construction materials in the country. Thanks to my investment, I made a fortune!
Best investments during a recession
The best investment opportunities during an economic downturn, may not be what you expect. Many investors make the mistake of becoming more conservative. But 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.
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. How do you balance these potential outcomes and yield the best investment opportunities in an economic downturn?
Here are four investment strategies for startups to consider making during an economic downturn and three that are likely best to avoid.
- Stock funds: A stock fund is a great way to invest during a recession. This is a great investment opportunity during an economic downturn. A fund tends to be less volatile than a portfolio of a few stocks. 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. Investors with a well-balanced portfolio need to remind themselves that the market has always come back from downturns.
- 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. So 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. 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 lower 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. The rates are likely to be much lower than otherwise. You can lock in an attractive mortgage payment for decades, so even if rates rise later, you still have that below-market mortgage rate. Many investors did 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. This is making real estate an attractive inflation hedge.
- High-yield savings account: Cash can be a good investment in the short term. Many recessions often don’t last too long. Cash gives you a lot of options. If you lose your job during a recession, it allows you to make an opportunistic investment if the stock market suddenly sells off. But there is a downside to holding too much cash. Inflation can eat away at your money. So, stick your cash in a high-yield online savings account and keep it for strategic purposes.
What to keep in mind before investing during an economic downturn?
When the economy is down, it’s normal for you to be curious about how you can make money by investing. Certain investments, such as stocks, can be riskier in a down market. However, you might be able to see large returns from a recession if you are strategic.
In a recession, the worst-performing assets are cyclical and speculative. Companies that fall into any of these categories can be risky for investors because of the potential they could go bankrupt.
Investors who want to survive and thrive during a recession will invest in high-quality companies. Such companies have strong balance sheets and low debt. They are in industries that historically do well during tough economic times.
How to Make Money Investing in a Recession
While it’s tempting to try to time the market when stock prices are low and falling. It might be surprising to hear that the best way to invest during a recession is the same as when the economy is growing.
- Rebalance Your Portfolio: You can change the balance of your holdings when you notice prices falling. You then rebalance your holdings or return your asset allocation to its original targets. When you rebalance during an expansionary phase, you’ll sell bonds. You’ll also buy stocks to return to your target allocation.
- Keep a Long-Term View: If you’re buying stocks or stock mutual funds you mostly won’t withdraw from your account for at least five to ten years. For that reason, you shouldn’t worry too much about short-term market changes.
Importance of Startup investing in an economic downturn
The public markets are in a difficult situation —but the private markets are alive and well. That’s because private investments are, at least in part, impervious to the ups and downs of the stock market. That makes them an incredibly attractive option for investors seeking safe harbor from the storm. Here are five reasons why private investments—like startups and real estate—might be the best options during economic pullbacks.
- Startups can grow during a downturn: The best startups are the ones that solve problems. If there’s one thing we know about economic downturns, it’s that they make problems more. That means for some types of companies, recessions can actually mean better business. This is true, especially for those that solve problems related to critical necessities like groceries and healthcare.
- Startups are agile: Privately-held startups, especially in the earliest stages, are very nimble. While deeply entrenched mega-corporations with thousands of employees are not. That’s because building a business from the ground up is often a matter of trial and error. That first prototype of a product might not work at all. Early market assumptions might be proven wrong in focus groups. A company’s third, fourth, and fifth hire might all be working in a new industry for the very first time.
Simply put, a company with fewer members is much more likely to be able to adapt its business operations. It may also be easier for a small company to cut costs. - Economic downturns can sometimes aid startups: For companies with a solid business model, a recession can actually come with a couple of sizable perks. For one thing, during a recession, most goods and services get cheaper out of
Don’t Discard Your Strategy during an economic downturn
Stock prices might be down, but that doesn’t mean you need to change the way you invest. This thought process applies to all kinds of investors.
During a recession, most investors should avoid investing in companies that are highly leveraged, cyclical, or speculative. As these companies pose the biggest risk of doing poorly during tough economic times.
A better recession strategy is to invest in well-managed companies that have low debt, good cash flow, and strong balance sheets.
Counter-cyclical stocks do well in a recession. They also experience price appreciation despite the prevailing economic headwinds.
Some industries are considered more recession-resistant than others. These are utilities, consumer staples, and discount retailers.
Risks vs. Gains of Investing in a Recession
- Gains: During a recession, most investors would be wise to avoid highly leveraged companies that have huge debts. These companies often suffer under the burden of higher-than-average interest payments. They are also faced with a decrease in revenue brought about by the recession. The likelihood of bankruptcy is higher for such companies than for those with lower debt loads. The likelihood of a drop in shareholder value is also high.
- Risks: Timing the market and trying to buy when prices are low or beginning to recover is risky. You can still face lots of volatility, even if the market seems to have fully recovered. This is called a “bear market trap.” You can get caught up in the optimism of the moment, only to see another fall in prices after the short-term rise.
Conclusion
Certain investments have performed in similar ways during recessions of the past. However, no one can predict what will happen in the market in the near term. There are always investment opportunities present. Stock prices can suffer a large fall over one month. Then rise again the next month, only to fall again a month later.
No one can predict what the stock market will do and how people will react in the short term. It’s wise to commit to your investment strategy during a market downturn so you can participate in the recovery.
Investing during a recession can be a difficult experience. As 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. Work to keep your emotions from driving your decision-making in whatever way works best for you.