A recession is defined when the Gross Domestic Product of a country drops for two consecutive quarters, and Unemployment cases rise by 1.5 percent or more in a year. The economic recession of 2008 significantly impacted the well-being of many countries worldwide.
On average, the stock market declines by 5.3% during an economic recession. The worst drop in the stock market totaled a loss of -36.4%. During the recession, the stock market reacts negatively, thus increasing volatility.
Types Of Stocks With The Biggest Risks
Being aware of which assets come with a big risk factor during a recession is as important as knowing which company you should invest during the crisis period. Assets and stocks with the biggest risk during a recession are often speculative, cynical, or clouted.
Let’s get to know these stocks in detail.
Speculative stocks: These stocks are essentially based on the optimism of the shareholder base. Fuelled by the economic boom, these stocks are characterized by extreme risks with a high possibility of returns in that risk’s compensation.
These kinds of investments occur in the markets of fine arts, currencies, antiques, and collectibles. It is better to avoid investing in speculative stocks during the recession as they don’t provide any assurance or value.
Cyclical stocks: These are related to employment and customer confidence., Both of which are high-risk zones during a recession. Cyclical assets move in the same direction as the falling economy.
Examples for these would be luxury commodities, high-end cars, furniture, etc. When the economy falters, consumers cut down the purchase of luxury goods, thus, bringing down cyclical stocks.
Highly clouted and leveraged companies: These companies have huge debt loads on their balance sheets and are burdened with higher than average interest payments. This leads to an unsustainable debt-to-equity (DE) ratio.
A highly leveraged firm is susceptible to tightening credit conditions that arise during the recession. With a higher chance of bankruptcy, investors should not opt for investing in highly leveraged companies.
Effective business strategies to protect your investments during a volatile stock market recession
- Revamping Investment Portfolio
Revamping your portfolio by including Real Estate Investments will be extremely beneficial for you even in the long run. According to a study conducted by Cians classes in India during 1991-2013, real estate assets and equity provided maximum returns to the investors.
Real estate outperformed all other assets with an annual rate of 20%, while equity generated an annual return of 15.5%.
Revamping your portfolio and including REI reduces the impact the volatile stock market prices have on investments during the recession.
Diversification Of Investments During A Recession
A strategy that is overlooked by most investors is the diversification of their assets and investments. Right after composing your investment portfolio comes the important step of diversifying it.
Investments spread across various industries and not tied down to any particular industry is an excellent investment strategy to undertake during a recession.
Diversify with gold or US funds. However, avoid purchasing physical gold like ornaments as many funds go into the making charges. Instead, buy gold ETF or invest in gold sovereign bonds.
The US-focused equity funds are also a very good option to diversify your portfolio. They come with two benefits. One, they allow the scope of geographical diversification. Second, these funds also bring in the scope of currency diversification for non-US residents.
Invest in different high-performing sectors because the positive impact of the stock market changes will allow you to generate high returns on them.
Diversifying your investment portfolio will work to your advantage. The gain from one industry will work as an antidote for losses the other industries incur. It’s considered to be one of the best ways to reduce your vulnerability during an economic crash.
Diversifying ensures the safety of your capital and allows you to shuffle among investments. Owning diversified investments protects you and your finances from industry-specific and enterprise-specific risks.
Opt For Dividend-Based Investment Options
Investing in stocks and commodities that offer high and regular dividends should be a part of an excellent investment strategy.
The dividend is a cash pay-out to investors made by the company at least once a year or, in some cases, every quarter.
Dividend based investments turn out to be an excellent investment choice when the stock prices spiral down. Dividend stock investing is a great source of guaranteed passive income.
A strong and regular flow of dividends stops you from selling off your investments during a recession. Dividends provide your investment portfolio, which is much-required stability during the recession. This saves you from selling off your investments during a crisis for your survival.
Stocks with the dividend feature attached to them are less likely to reach unsustainable figures and values.
Dividends offer tax advantages because of which they are considered to be an excellent investment choice.
Curating Cash Reserves For Emergencies
The strategy to stock cash for emergencies that occur during a recession is another effective investment strategy. The question is, how can you raise cash if you are already battling the recession?
There are three ways to do it.
- Firstly, you can raise your cash rank by keeping any of the new aids liquid. You can even raise your cash position by not investing in further new stocks for the time being.
- Secondly, you can hold money from your portfolio, and instead of moving the entire cash into new ventures, you can redirect some of your investments into cash itself.
- Thirdly, tax refunds and bonuses can add up to your cash stock too.
Keeping aside cash for emergencies will reduce the overall volatility of your investment portfolio. These funds can move towards either end of the asset spectrum, thus maintaining and controlling your investment portfolio’s overall volatility.
Another great advantage is that the more cash you possess, the better your chances to position yourself according to the changing market conditions.
Mark And Maintain A Limit To Investing Fees
Nobody wants to be burdened with several unreasonably high investing fees with the extremely volatile market. One of the sure-shot ways of investing at zero fees is to invest in real estate directly with the managers.
- Limit and reduce discretionary spending and defer from big-ticket investments.
- Debt reduction is another policy that should be adopted during a recession.
- Be fully aware of the expenses that are deductible from your returns. Know your investments better.
- Always look for options that do not impose high investing fee charges.
- Avoid purchasing cars or houses or even a luxury holiday package during a recession.
- Using credit cards will add up to the problem.
Low or zero investing fees reduce the burden that you carry on your back during the recession. Even if you face loss, the loss will not be as huge as investing and losing assets with high investing fees.
Higher investing fees might look profitable, but if you are amidst the recession, it is best not to take the risk as it might be extremely harmful to your investments.
Invest In Un-Correlated Markets During A Stock Market Recession
Investing in assets that do not fluctuate with the crashing market is a great strategy to defeat recession and protect your investments. Un-correlated markets like real estate possess a long-term value even when the stock market goes through a recession period.
You would want to include assets in your portfolio that have a very low market correlation with stock markets to help manage your risk.
Real estate is a good hedge against the volatility of the stock market during the recession.
Investing in assets with a very low correlation with the stock market will help you maintain steady returns and appreciation even when the recession is at its worst point.
Curate Debt Strategies
If you cannot afford the formal mechanism for loan restructuring, try to leverage your repayment history. Also, your relationship with the lender to get some relaxation.
Call up your creditor directly to discuss programs that are especially available to you.
This is how you can retain more of your investments until the recession phase ends.
The stress of repaying and clearing your debts amidst the recession crisis is reduced to some extent if you can convince the lender or the bank to provide you with some concessions.
Do Not Stop Your Systematic Investment Plans During A Recession
SIP or systematic investment plans interest rate goes up to 22%, making it an excellent investment instrument.
SIPs provide investors with the opportunity to save regularly, even during the recession, while benefitting from the long-term advantages of dollar-cost averaging or DCA. This is a very crucial and effective weapon that you can employ during the recession period.
If you stop your SIPs fearing the crashing stock market, you will lose the golden opportunity to accumulate SIP units at a lower price, and by the time you will get up to start your SIP again, the market would have recovered and moved way forward.
It defeats and defames the very function of a SIP by denying the individual, who is investing, the opportunity to accumulate more when prices are low.
With the market turning weak and feeble at a fast rate and the NAV funds touching a new low so frequently, SIPs fetch you more units even when the stock market is affected by the recession.
After the market recovers, the SIP units that you stored during the recession period will be changing into a huge amount that will benefit your investment portfolio and your credit score.
Standing and sticking with SIPs during times of hardship and crisis pays off later.
Invest More In Bonds During An Economic Recession
Purchasing safe havens during a recession will help your finances to survive the crash successfully. Assets like bonds and treasury bills turn out to be excellent investments.
The best way of making money through your bonds is through interest payments. You receive regular interests, which is based on the bond’s value and interest rate.
It might not always result in a higher return than stocks, but the returns and income from bonds are pretty much guaranteed. However, do not just limit yourself to investing in only bonds.
The biggest plus point about investing in bonds is that you receive a return on the principal. This return is guaranteed, and when the bond term expires, you are just paying that principal. Bonds are huge saviors during a period of economic uncertainty.
Keep A Lookout For High-Quality Stocks
In normal situations, when the market is not battling recession, high-quality trading stocks would be a difficult task.
These high-quality stocks are often available at relatively lower costs. Being an extremely rare opportunity, you should never miss it at any cost.
Many investors dump these high-quality stocks due to the fear of recession and falling share prices.
A great opportunity like this appears very rarely in a lifetime. Investing in these high-quality stocks wouldn’t be possible if it was not for the recession phase. These stocks level up your portfolio score and provide you with a better and higher position in the market.
Invest In Recession-Resistant Industries To Minimize The Risk
While it might sound strange and not extremely surprising, many companies perform quite well during the recession period. Keep a lookout for these companies.
Adding stocks from these industries will not only ensure the safety of your finances but also leverage your portfolio.
Counter cyclical stocks tend to perform quite well during a market crash because their demands reach new heights when the income level falls or when there is an air of certainty in the economy.
With these industries’ stock price moving opposite to the crashing market prices, these industries become a great and successful investment option.
These industries see an increase in their demands when people cut back on expensive or luxury goods items and seek a certain sense of relief from fear and uncertainty.
The outperforming generally includes companies like consumer staples, firearm, grocery stores, cosmetic manufactures, funeral services, alcohol manufacturers, discount stores, etc.
Investing in these companies assure you that your investments and financial stand would not be adversely affected by the recession. Your investments are in safe hands.
Invest In Companies Featuring A Strong Balance Sheet
During the recession, an excellent investment strategy would be to invest in companies and industries that have a record of maintaining strong balance sheets and business models despite the recession. Companies like this are less vulnerable and rarely affected by the tightening recession scenario.
Some of the companies that fall under this category are a part of industries like utilities, defense stocks, and basic food conglomerates. Make sure to study a company’s financial report in depth before investing, especially during a risky time like a recession.
Like we trust and use brands with high performing ability and safety features, investing in high performing companies during a hard time like a recession will guarantee guaranteed safety from the consequences of a bad recession period.
To Sum Up
19 October 1987 witnessed the biggest stock market drop in history with a one day drop of 508 points. However, many investors took advantage of the situation and improved their stand in the market by deploying some of the investment strategies mentioned above.
The economic boom soon overcomes the hard-hitting and ugly recession. The phase where the economy is moving from recession to recovery is when investors should revamp their strategies.
This transition period is a very favorable time for investments. The market is characterized by a rising growth rate and low-income rates.
With the market recovering from the recession to a much better version of itself, the easy money conditions turn out to be extremely favorable and beneficial for the individuals who faced the recession’s blow.
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