Recently more and more consumers have been asking the questions whether investing in recession times makes sense. The more pertinent questions to ask would be what a recession really is and how does it effect your investments? A lot of analysts are torn on the fact of what the right time for investing is, especially considering that we are in one of the worst financial crisis in modern history.  However, they all do agree on the one point that recessions are usually a buyers market and if you have saved up for a rainy day, this might be the ideal time for some recession buying.

Investing In A Recession: Definition Of Recession

Before we discuss recession investments and how to go about investing in recession, it is important to understand the recession. Literally speaking a recession is characterised by slowdown in economic activity over a considerable amount of time (usually over 2 quarters). However more and more economists have forgotten the rule of thumb and simply identify a recession as a phase where the Gross Domestic Product (GDP) falls over two consecutive quarters and this is coupled with a rise in unemployment levels (usually 1.5%). In a nutshell it is an extremely shaly time for the economy with consumers and businesses feeling the pressure alike. A few indicators of a recession are listed below:

1. Continuous falls in the stock market.
2. Slowdown of economic activity
3. Rise in unemployment levels and jobless claims.
4. Falling interest rates.

Investing During Recession

A lot of investors were affected badly last year as they had a lot of money in stock market. The key to investing in recession is having a diversified recession investment portfolio without over exposure to any one single asset class (the main asset classes are Cash, Fixed Interest, Domestic Equity, International Fixed Interest, International Equity and Property). Investors must keep in mind that economic cycles come in phases and are cyclical. Ups are followed by downs and vice versa. The important thing to note that nothing lasts forever. It is noteworthy that during recessions almost everything on the stock market is at half price or lower. Depending upon your investment risk profile it might be beneficial to ascertain what level of risk you are comfortable with. For instance, if you are an aggressive investor you might purchase stock in emerging companies or unlisted property trusts. However if you are more conservative you might opt for stock in major banks or blue chip companies where to a large extent you are comfortable that your capital is safe. Before you get engaged in recession buying, make sure you fully ascertain the type of recession investments you are comfortable with.

During a recession, owing to the fact that almost all stocks on the market are cheap, it is easy to get carried away and get lured into a bad recession investment. Remember to do your research and ascertain your risk profile and comfort level before making recession investments. If you have been hoping to buy a property and take out a mortgage loan in the future and want to invest in the stock market, to ensure that your recession investments and funds grow enough to give you the right amount of money to seal the deal, then you need to be doubly careful. While is at nearly half of what it was from its peak in 2008, if you do not chose your recessions investments correctly you might miss out on the advantages investing in recession during a rising market and find yourself short right before you’re about to make your property purchase.

Tips For Investing During Recession

Below mentioned are a few tips to help consumers with recession investing:

• Use The Interest Reductions To Pay Off Debt: One of the characteristics of a recession is falling interest rates. The government eases the pressure on the economy by reducing its cash rate and thereby asking the financial institutions to reduce their corresponding interest rates. Use these interest rate and repayment cuts for debt settlement and improve your credit standing.
• Stick To The Basics: Remember investing is personal. Assess your own risk profile and chose recession investments that you are comfortable with. Do not get lured by all the hype in the market place. Remember to stick to the basics of investing in recession.
• Be Patient: If you are of the opinion that recession investments in general are a get rich quick scheme, then recession investing might not be for you. Remember business phases are cyclical and falls are followed by rises. Hold on to your investments because a market rise might be just around the corner.
• Tax Breaks: Do not overlook your LSA returns. These can boost your funds. Stay positive and remember to use to your tax breaks and do not let them erode away.
• Stable Stocks: Investors try and find the next big thing and put all their money into emerging companies. Look for stocks that are holding their value and are relatively stable. This could be the difference between you losing your entire portfolio and you being in a fairly advantageous position with capital appreciation.
• Diversification: Diversify your recession investments across the basic asset classes. Do not place all your eggs in one basket. Diversification can help you minimise the risk of losses or portfolio reduction.

Now that we have looked at the basics of investing during a recession, it is once again important to reiterate that consumers should assess their own risk profile and should buy recession investments they feel comfortable with. It is easy to get moved by the media stories but remember investments are personal and at the end of the day it should be you who should be making the decision about recession buying and selling of investments. Although we have stated that a recession is a buyers market, be careful and ensure that you make the right decision and seek the help of an experienced financial planner to guide you along the way.

References:

1. NBER’s statement on the recession and FAQs – USA Today
2. Recession: What Does It Mean To Investors – Investopedia
3. How To Invest During A Recession – Smart Money, The Wall Street Journal