Recession is a word feared by almost everyone. History has shown us that a recession can turn someone rich into poor and vice versa. If you play your money right, it might be your rags-to-riches arc. However, easier said than done. How do you cover your expenses, fill up your savings, and expand your investment portfolio during a recession? Here are several investment strategies you might want to focus on.
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Identify Stocks and Assets with the Biggest Recession Risks
Know which assets are worth your money in the long run and which are considered passing trends. An asset with many hyped-up comments about it is not necessarily good. Sometimes, new investors are easily swayed by assets marketed or recommended by influencers or someone they know. Hence, the best approach to all investment strategies is always to assess the risks, track the history, and find the answers to these several questions:
- Are the assets easily liquidated or converted into cash? Keeping highly liquid assets to protect and grow your wealth is wise.
- Are the stocks highly leveraged? Check the debt-to-equity ratio. During a recession, several companies go into more debt to keep business afloat. Before taking a step further, see the prospectus and the company’s current situation by reading the news.
- Does the asset depend on consumer confidence and employment? These companies may largely depend on seasonal sales, such as travel agencies, airlines, hotels, furniture, and clothing. It’d be best to avoid investing in cyclical stocks as a recession can push a company to lay off employees to cut the budget and deal with the decreased demands.
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Have Enough Cash Reserves
Always have a separate budget for daily needs, savings, and investments. Recession pushes you to prioritize your day-to-day expenses in times of low employment and high risk of losing your job. Therefore, before anything happens, manage your finances and set aside cold hard cash for rainy days—cash, not gold or jewellery, not even foreign currencies.
Your challenge would be to keep your money value despite inflation. You’re advised to save your money in a bank savings account. Don’t cash out your investment just yet. See how the market progresses and keep a cool head. When the market crashes, use your investment fund to purchase blue-chip stocks at the lowest price. That way, you won’t get stuck in cash as the market rises.
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Understanding Cyclical Stocks and Defensive Stocks
The main difference between cyclical stocks and defensive stocks is stability. While cyclical stocks are commonly affected by macroeconomics and the economic cycle, defensive stocks can distribute regular dividends and earnings regardless of the market condition. Well-established companies with impeccable reputations fall under this category. Most investors choose defensive stocks as their long-term investment since it has low risk.
However, cyclical stocks tend to have higher gains, but it’s not a suitable choice during a recession. If you wish to dabble in both, the best practice would be to invest in cyclical stocks for a short period and sell it when the stock starts to plummet.
Kumpulan Wang Persaraan (KWAP) regards banking and healthcare stocks as defensive stocks. Generally, these companies can be your go-to assets in times of uncertainty. But beware, as no assets are risk-free.
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Adopting Ringgit-Cost Averaging (RCA)
One of the most popular tried and tested investment strategies is Dollar-Cost Averaging, or in this case, Ringgit-Cost Averaging (RCA). You have to put in a set amount of money regularly. Doing this will help increase the value of your asset as the price declines. Besides, RCA is a great strategy to mitigate risks, which is the core plan when investing during a recession.
You can regularly invest using cash or reinvest your dividends. Either way, RCA is a highly useful approach, especially if you’re the type to invest and forget.
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Avoid Growth Stocks During Recession
On paper, growth stocks seem like a desirable option among investors. They yield a high growth rate – much higher than the blue-chip stocks – yet never distribute dividends. However, please note that most growth stocks come from profitless companies. While the companies have a high valuation, they have zero profits. These companies have a much harder time during a recession, thus elevating investment risk.
Recession is inevitable, but it doesn’t mean you must halt your investment activities entirely. Use these investment strategies to counter-attack the effects of the recession while still being able to grow your wealth.