A Comprehensive Guide To Investing During A Recession
It’s always a good idea to invest your money when the market is down. Why? Because that’s when stocks are cheap. You don’t want to invest when asset classes are expensive. That’s a good way to get set up for a rug pull. You want to start dollar cost averaging when stocks and bonds are low. When prices in the market drop, that’s typically when you can say stocks are “on sale.”
- Take Advantage Of Dollar Cost Averaging (DCA)
You want to start deploying a DCA approach. The majority of experts recommend utilizing a DCA approach to investing. After all, timing the market is difficult you have to assess the key drivers of performance. You want to focus more on spending time in the market if you have a long-term vision. How do you start this process? You start by scheduling your first investment. You come up with a schedule where you will be making identical investments no matter what happens with the stock or market. One of the best examples of DCA is an employer-sponsored 401(k). You will be investing a certain percentage of your income monthly no matter what the market conditions look like.
Right now would be a great time to start investing money into the markets. It’s a good time to put money into investments like retirement accounts.
If you are looking to remain fully committed over the long haul, you can always lock in the investments you make by using automatic contributions. The market has gone up over time. The market is increasingly likely to recover in the future. Because of this, it allows you to leverage the dips to your advantage. The short-term downtrend can prove to be a major advantage in a DCA approach because you get cheaper prices. You don’t have to stop investing when times are tough because that’s the strategy you are deploying.
Keep in mind, if you do invest in global investment trusts when the market is in a downturn, you’ll need to keep your money tied up in the market and wait for it to recover to see any type of positive return.
- Maintain Savings
If you are going to be investing during a recession, you need to ensure that you are maintaining a healthy savings account. It can be easy to avoid putting money towards investments when the market is in a downturn. A lot of people use their savings to fund their lifestyle. There was a survey conducted by CNBC that showed that a lot of Americans experienced either a pay cut or they completely lost their jobs because of the pandemic. Thus, a lot of people are at a point where they are willing to sell some of their assets to get the money they need for basic living expenses.
The consequences of the pandemic have made a lot of people aware of how important it is to have a nest egg. They need to have liquid assets they can use to help them in times when the economy is down. After all, a disaster like COVID can occur at any time. It’s because of this that experts recommend keeping anywhere from 3 to 6 months of living expenses in an emergency fund. A good way to do this is by having a bank account with enough cash reserves that you can tap into whenever you need them.
It’s a good idea to utilize high-yield savings account for this. That way, you can earn as much interest as possible on that money.
How To Properly Invest During a Recession?
- Invest In Companies With Dividends
The first thing you want to do is invest in companies that offer dividends. Companies that hand out dividends are typically the safest when it comes to recessions. Why are they the safest? Because they are handing out income to their shareholders.
A lot of the companies that hand out dividends are cash rich. They have enough money to pay their shareholders back. This can help you in a big way when it comes to a recession because you are going to have income coming in even if the stock isn’t doing its best. Siblis Research reported that the average payment for stocks with dividends was 1.8 percent of the original investment in 2019.
- Think About Growth Sectors
You need to look at the macro aspect of the economy. What are the sectors that are going to experience the most growth as a result of a recession and which sectors will experience growth coming out of the recession? While it’s impossible to predict this with certainty, you can figure out which sectors are not worth investing in. You can also make educated guesses as to what sectors are going to grow based on macro conditions. For instance, with today’s remote working economy, more and more people are using delivery services, e-commerce, and more. Thus, these sectors can be considered safer plays. Also, remote healthcare businesses are likely expected to experience major growth. You want to invest in the sectors that have the highest asset values.
- Diversify Your Portfolio
This is investing 101. You need to be diversifying your portfolio whether we are in a recession or not. You need to invest in varied industries. You want to have a diverse portfolio to mitigate risk. It’s a good idea to go with low-cost index funds for this purpose. You want to have hundreds of stocks in your portfolio to diversify enough. This can help you mitigate the risk of a specific sector entering a downturn and wiping out your entire portfolio with it and all the related debt issues. You need to balance risk with maximizing gains. A good way to do this is by investing in index funds that already do a lot of the diversifying for you. This can help you better position yourself to make money as the market turns a corner.