Diamonds in The Rough: What To Invest in During a Recession

Posted On March 11, 2020

When recessions occur, investors need to exercise plenty of caution in the market. While some may respond to economic downturns with frugality, there’s plenty of opportunities out there for those willing to exercise a level of vigilance in monitoring the investing landscape. 

Typically, assets that are highly leveraged, cyclical and speculative are dangerous investments while a recession is taking place. If a company appears to fall into one, or more, of these categories, there’s a significant risk that a potential bankruptcy could wreak havoc on an investor’s portfolio. 

It’s difficult for investors to seek out opportunities during a recession. The prospect of industry-wide losses can be unavoidable. However, this doesn’t mean that it’s impossible to make money on your investments. By exercising an extra level of caution, and seeking out companies with strong balance sheets, lower debt and a healthy cash flow investors can build highly profitable portfolios in even the most adverse of circumstances. 

The act of making wise investments requires lots of research and patience at the best of times, so to build a portfolio in a recession is a tricky task. Luckily there are some great pointers and tips that investors can follow to ensure that their assets are well protected. Let’s take a deeper look into some of the best investment strategies to follow in recessionary environments. 

Reliable dividends

One of the most reliable ways of maintaining a passive income within an adverse financial climate can be through investing in dividend stocks. 

When you’re looking at dividend stocks to buy into, it could perhaps be most wise to look out for businesses with low debt-to-equity ratios as well as healthy balance sheets to boot. 

If you’re considering jumping into the world of dividend stocks, it’s vital that you choose a reliable company in which to place your trust. There are plenty of metrics out there that are used to quantify which businesses are better for your investments and which can be worse – but one of the most reliable resources out there for you to consult is the Dividend Aristocrats

In a nutshell, the Dividend Aristocrats consist of S&P 500 index constituents that have consistently increased their dividend payouts over a period of 25 consecutive years or more. 

S&P 500

(Standard & Poor’s 500 dividend yields in the U.S. from 2000 to 2018. Image: Statista)

While the Dividend Aristocrats aren’t exactly immune from suffering the effects of an economic downturn, the fact that they’re capable of delivering dividends on a consistent basis throughout the 21st Century – and notably the downturn of 2008 – is a clear sign of market strength and pedigree for investors. 

Of course, the notion of living on dividends alone is a difficult one for investors, but in terms of exercising caution in the marketplace, there are few more effective investment opportunities out there. 

Counter-cyclical stocks

Elsewhere, counter-cyclical stocks typically perform well during times of recession. The stock price for counter-cyclical stocks tends to move in the opposite direction of emerging economic trends. This means that when world markets are performing well, counter-cyclical stocks decrease in value, while when an economic downturn hits, they begin to rise. 

Counter-cyclical stocks are comprised of companies with dividends and strong balance sheets as well as comfortable business models. The type of counter-cyclical stocks we’re likely to see come from businesses in the field of utilities, consumer staples and defences. 

While cyclical stocks relate to non-essential goods and services, counter-cyclical stocks refer more companies that offer essential services. 

When the prospect of a recession appears to be unavoidable, investors typically turn to these types of industries to build some industrial safety nets within their portfolios. 

This group is composed of companies with dividends and massive balance sheets or steady business models. Some examples of these types of companies include utilities, consumer staples, and defence stocks. In anticipation of weakening economic conditions, investors often add exposure to these groups in their portfolios.

High-performance companies

It may seem a little like it’s stating the obvious, but it’s really worth researching companies that possess exceptional balance sheets despite the choppy financial waters. 

By taking the time to study a company’s financial reports, it’s possible for you to determine a range of signifiers for stock investing. Including the state of their respective debts, the strength of their cashflows, and the state of their profit margins. 

You may feel that your mind’s made up concerning a range of profitable or underperforming industries, but in a time of economic uncertainty, it’s extremely rare for investors to luck out on under-researched investments. 

To help secure your financial future, get into the habit of researching the financial history of the companies you’re looking to invest in. Before you take the plunge and buy stocks, ask yourself whether or not any second-guessing has been performed in the buildup to your decision. 

Fools rush in where angels fear to tread, and there have been many experienced investors in the past who have ran with clouded judgments and failed to secure their assets against a recession. 

Look to real estate

Perhaps the safest form of investment when it comes to a difficult financial climate can be found in real estate. 

The housing market was thrown into turmoil during the time of its 2008 collapse, but what was ultimately a disaster for homeowners proved to be something of a boon for retail estate investors. 

Investors have adapted to move quickly during recessions to buy property that’s experiencing a notable drop in value. The uncertainty that recessions cause can send house prices tumbling in affected areas. This has paved the way for a reliable formula among investors. 

When an economic downturn occurs and house prices fall, investors buy the property at a cut-rate, then rent the home out over the course of the economic downturn, before selling the house for a profit when the housing market recovers. 

This particular form of investment is favoured by many investors. History shows us that even high performing companies can have its fortunes turned on its head in a relatively short time, and the prospect of a company you’ve bought into going bankrupt can be a disastrous thought for many. Real estate is something of an immovable force when it comes to investing, and the consistent rise in house values shows no sign of waning any time soon

Precious metals can be a safe option

On the topic of safer options, there are few better performers than precious metals like gold and silver when it comes to a market downturn. 

It’s typical for investors to turn to tangible assets when a recession is looming, and while demand for metals remains constant, the increased demand from investors helps to push the price of silver and, in particular, gold up over the course of a slowdown. 

There are plenty of ways in which you can carry on investing in confidence during challenging economic landscapes. While commodities offer familiar comforts, you don’t have to look at life away from stocks if that’s where you feel most comfortable. 

If you wish to exercise caution, reliable dividend stocks can help you to maintain a steady income while markets are blighted, but if you have the time to conduct meticulous research into high performing companies, it’s entirely possible to continue to yield healthy profits even in gloomier times for the markets.

Written by Daglar Cizmeci
Investor, Founder and CEO with over 20 years’ industry experience in aviation, logistics, finance and tech. Chairman at ACT Airlines, myTechnic and Mesmerise VR. CEO at Red Carpet Capital and Eastern Harmony. Co-Founder of Marsfields, ARQ and Repeat App.

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