When the market is soaring, it’s easy to forget that what goes up can also come down. But economic slowdowns tend to be cyclical, which means that another recession is in the future. Whether it’s fast-approaching or still a ways off, it’s wise to prepare for its eventuality. This way, you won’t join the panicking stampede out of stocks and into cash. Instead, you’ll remember that stocks can perform even during a recession – you just need to know which ones. A financial advisor can help you build an investing plan with a recession in mind.
1. Seek Out Core Sector Stocks.
During a recession, you might be inclined to give up on stocks, but experts say it’s best not to flee equities completely. When the rest of the economy is on shaky ground, there are often a handful of sectors that continue to forge ahead and provide investors with steady returns.
So if you want to insulate yourself during a recession partly with stocks, consider investing in the healthcare, utilities and consumer goods sectors. People are still going to spend money on medical care, household items, electricity and food, regardless of the state of the economy. As a result, these stocks tend to do well during busts (and underperform during booms).
2. Focus on Reliable Dividend Stocks.
Investing in dividend stocks can be a great way to generate passive income. When you’re comparing dividend stocks, some experts say it’s a good idea to look for companies with low debt-to-equity ratios and strong balance sheets.
If you don’t know where to start, you may want to look into dividend aristocrats. These are companies that have increased their dividend payouts for at least 25 consecutive years.
3. Consider Buying Real Estate.
The 2008 housing market collapse was a nightmare for homeowners. However, it turned out to be a boon for some real estate investors. When a recession hits and home values drop, it may be a buying opportunity for investment properties.
If you can rent out a property to a reliable tenant, you’ll have a steady stream of income while you ride out the recession. Once real estate values start to rise again, you can sell at a profit.
4. Purchase Precious Metal Investments.
Precious metals, like gold or silver, tend to perform well during market slowdowns. But since the demand for these kinds of commodities often increases during recessions, their prices usually go up too.
You can invest in precious metals in a few different ways. The most straightforward route is buying coins or bars from a seller or coin dealer. While this is different than buying a security, it’s technically as good as any other option.
If you’re more interested in buying precious metal securities, turn your attention to ETFs. These funds are collections of investments within a single industry, which, in this case, is the precious metal market. You could also purchase a gold IRA if you’re saving specifically for retirement.
5. “Invest” in Yourself.
If you’re lose your job and income during a recession, you can rebound by “investing in yourself.” You could go back to school to gain additional knowledge or skills that could help you get a better job.
Paying down debt is another option if you worry that your job situation might go south at some point. The less money you have to spend on bills, the less stressed you’ll feel during an economic crisis.
Are We Currently in a Recession?
Although the term “recession” is thrown around quite a bit, its actual definition comes from the National Bureau of Economic Research, or NBER. According to its website, the NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” Thus, the NBER is the official institution that determines if the country has actually entered a recession.
As of Feb. 2023, the NBER does not consider the U.S. to be in the midst of a recession. In fact, it hasn’t declared a recession since the 2008-2009 housing crisis. The NBER determines this through a myriad of factors that involves analysis across a wide range of sectors within economic markets. It also accounts for citizen-level data points, like unemployment and personal income.
Bottom Line
If you’re investing for the long term, a looming recession shouldn’t panic you. You may want to off-load some investments to take some profits off the table. But for the most part, your strategy should not be to sell when prices are low. You may think you’ll get back in when prices stop falling, but it’s impossible to call a bottom until it passes.
Instead, you should hold the positions that you entered as long-term investments. That said, if you have cash to invest, you may want to consider buying recession-friendly sectors such as consumer staples, utilities and healthcare. Stocks that have been paying a dividend for many years are also a good choice. These tend to be long-established companies that can withstand a downturn.
Tips for Smart Investing
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If you’re unsure of how to build a portfolio that accounts for a recession, a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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A recession has the potential to bring serious losses. That’s why any investing plan starts with understanding how much risk you can tolerate. SmartAsset’s asset allocation calculator considers your risk tolerance to guide you to the optimal portfolio.
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Source: finance.yahoo.com