When the economy is in a recession, your investing strategy should be different than when the economy is booming. You should be more conservative with your investments and focus on preserving your capital. Growth stocks and mutual funds are riskier during a recession and should be avoided. Instead, focus on investments that will preserve your capital and provide a steady stream of income, such as bonds and real estate.
Having an emergency fund is crucial during a recession
Investing during a recession can be tricky. On one hand, you don’t want to put all of your eggs in one basket and lose everything if the stock market crashes. Spread your investments among various companies, industries and countries.
a) Manage your risk by diversifying between stocks, bonds and alternative investments.
b) Broad-based index funds give you exposure to large numbers of stocks. This spreads your risk over many companies and countries. You can invest in broad-based index funds such as the S&P 500® Index Fund Investor Class (NYSE:SPY), which tracks the Standard & Poor’s 500® Index. Or you can choose an index fund that tracks a particular sector or region, such as international markets (e.g., the International Vanguard Fund – International – ETF (NYSEARCA: miss out on opportunities to make money if the market starts to rebound.
Here are seven investing strategies to consider during a recession:
1. Have an emergency fund. This is crucial in any economic climate, but especially during a recession. Having cash on hand will help you weather any financial storms that come your way.
2. Invest in solid companies. Look for companies with a strong track record that are likely to weather a recession.
3. Diversify your portfolio. Don’t put all your eggs in one basket — not even in a solid company. Spread your investments among various stocks, bonds and alternative investments.
Consider investing in a mix of the following:
– Bond funds: For stability and yield, consider bonds. While individual stocks can bounce around up and down, the value of bonds is fixed. Bond funds offer diversity and fixed rates of return.
– Growth stocks: In spite of a recession, some companies will do well. Growth stocks are high risk, but offer the potential for enormous returns.
– Value stocks: Like growth stocks, value stocks have high risk and offer the potential for great returns. But instead of focusing on rising P/E ratios, value stocks seek to buy undervalued companies and turn around the company’s fortunes. The investments are usually conservative and stable.
– Alternatives: Alternative investments include real estate, credit, commodities and hedge funds. These risky, but can pay off.
– ETFs: ETFs are a low cost and highly diversified way to invest. They can be used to track an index (such as the Standard & Poor’s 500® Index) or invest in various sectors of the economy (such as energy or technology).
4. Review your insurance coverage. If you need additional insurance, now is the time to get it. Things such as life insurance, health insurance, income insurance.