15 Core Investment Strategies to Apply During and After Recession

Don’t immediately sell your assets. When stock prices begin to fall, it can be frightening to see your money slipping away from you. It may be tempting to sell these stocks, but most financial advisors agree that selling at the first sign of recession is a bad idea. For one, stock markets move several months ahead of the economy as a whole, so by the time you know there is a recession, your assets will likely have already decreased considerably in value.Additionally, trying to systematically sell off and buy assets at just the right time, while advantageous in theory, is well outside of the ability of most individual investors.

• It may also be tempting to base your actions off of records of past recessions. For example, you may see that tech companies rebounded well after the last recession and think to invest in tech. However, this is unwise, as no two recessions are the same.

Don’t short sell stocks before a recession. Short selling essentially involves borrowing shares of stock, then selling them with the expectation that you will buy them back later at a lower price (because you are betting on that stock doing poorly instead of doing well). You will then return the borrowed stocks to the lender having made a profit off of a poorly performing stock. However, this is incredibly risky and can expose you to unlimited risk if done improperly. Even if a recession is reason to think a stock will decrease, you can’t predict the market.

Evaluate your position and holdings. The amount of risk exposure of your portfolio will determine how well it fares during a recession. If you own a lot of high-risk debt or shares of new or struggling companies, you may experience significant losses during a recession. Some of these losses may never be recovered if the companies backing the investment fail during a recession. Conversely, conservative investors may experience relatively minimal losses during a recession. Consider your own position before taking action.

Decide which investments to keep. Usually, large and established companies will have the know-how and capital reserves to weather a recession. Any investments in these companies are best left untouched, as they will likely rebound. The same is true for any high quality bonds, especially government bonds. These will likely increase in value due to decreased interest rates intended to boost the economy out of the recession.

• Other contra-recession investments include precious metals and investments in companies that produce staple goods (like food).

Decide which investments to sell. You may consider selling investments in what are known as cyclical companies or any companies that have large amounts of debt relative to their assets. Cyclical companies are those that rely on consumer confidence and discretionary spending to survive, like consumer electronics and luxury clothing. Recessions conditions mean that these companies are at risk for lower sales and lower profits, potentially leading to losses and bankruptcy. Similarly, companies with high ratios of debt to assets, also known as highly-leveraged companies, may be unable to pay off their debt during a recession.

Invest in counter-cyclical stocks before a recession. These include companies that specialize in defense, consumer staples, and utilities. The fact that these companies provide necessities makes them less exposed to recessionary revenue drops.Counter-cyclical stocks should be part of a conservative portfolio before a recession. Buying them at the start or during a recession exposes the investor to losses as the economy recovers.

• Keep in mind that as the economy recovers, it may be a good idea to limit reliance on these stocks. These counter-cyclical companies will do poorly as investors and consumers turn to the fast-growing, cyclical companies. That said, these companies are still sound investments and will likely still build value in the long run.

Buy reliable government bonds. These investments are not only incredibly reliable and safe, but will also likely increase in value over the course of a recession. The most common type of high quality bond is the United States Treasury Bond, which carries virtually no risk. You may also consider High quality or Premium rated (AAA or AA) bonds. Certain foreign bonds may also be reliable enough to weather recessions. For more information on investing in bonds

Invest in precious metals. Precious metals, particularly gold, are a good investment in a recession. During times of stability, investors are more likely to take chances on speculative investments and the price of gold will fall. However, when there is a recession, gold prices tend to rise, making them a good investment during a recession.

Consider buying into mutual funds or EFTs. Mutual funds and EFTs hold a diversified portfolio of stocks specifically designed to grow through varied market conditions. Because of the depressed value of stocks, a recession is a good time to buy into a mutual fund that will likely grow quickly upon exiting the recession.

• diversification is the risk management strategy in place with a large portfolio of security. Most investors cannot get the broad diversification in their portfolios that they can get from a mutual fund or ETF.

Double-down on your current portfolio. As long as you are still employed and making money as you were before the recession, consider contributing even more money to your portfolio of investments. Recovery will bring swiftly-increasing asset value and could earn you a lot of money, so it’s best to invest as much as possible at this point.

• If you purchased your original investments for long-term, lower stock prices are an opportunity to buy at lower prices with the expectation that the stock price will eventually reflect the continued good performance of the company.
• Only double-down on those companies that you want to own long-term due to their good management. You do not necessarily want do double-down on of the stocks in your portfolio.

Don’t leverage your investments. Leveraged investing, or buying assets with borrowed money, is an incredibly risky strategy in any market. During a recession however, that practice becomes even riskier, as companies that an investor chooses to invest in may unexpectedly experience a drop in stock price or, even worse, fail completely. In short, leveraging can magnify your losses as much as it can potentially magnify your gains and in the end you could lose everything by making the wrong call.

Maximize your contributions to your 401(k). The recession also means that any money contributed to a 401(k) or other retirement account will buy more shares of stock in the fund’s investments than it did before. Consequently, these contributions have the potential to grow dramatically during recovery.

Reintroduce risk. As a recession draws to a close, you will begin to see stock prices returning to their pre-recession levels. This is the time to invest (or reinvest) in those highly-leveraged companies or cyclical companies that survived the recession. Like all investments though, these stocks will still carry risk and may not increase in value just because the stock market as a whole does.

Reassess your position. Consider evaluating your investments’ performance through the recession. If some did not recover as well as others, give them more time to come back in price if you truly believe in the company and expect them to do well in the long-run. In addition, consider the effect that the recession may have on foreign markets if you hold any foreign investments. After all, we’ve seen a recession spread across the world.