Investing During A Recession: Why and How To Do It

investing during a recession
Worthy Staff

By Worthy Staff | Apr 8th, 2020

You may think that investing during a recession is counterintuitive – shouldn’t you keep any money you have as safe as possible during an economic downturn? Sounds logical. However, there are a few strategies to investing in stocks that are set to perform well during this time, as we’ve learned from previous recessions. There are also some details about this recession that could give you a clue into where it makes the most sense where to invest (and where it makes the least). Let’s turn to the experts. 

Recession Investing – A General Rule of Thumb

Although the current recession is much different than previous recessions, there are still a few general rules investors know to follow when it comes to knowing where to put their money. Know that while you may be thinking that now is not a good time to invest, with the right stock you could potentially make a nice nest egg for yourself.

Stocks fall into one of two categories: high-risk and low-risk. While you may be familiar with the normal high and low risk stock to invest in, the terms shift slightly when a recession comes along. Investopedia has a lot to say on investment strategy during a recession

Big-Risk Stocks

Big risk during a recession means companies that are highly-leveraged, cyclical, or speculative.

Low-Risk Stocks

Economists know from previous recessions which stocks tend to do well during a recession. These are what is know as “recession resistant industries”, such as consumer staples (dairy, bread, toilet paper), grocery stores, discount stores, alcohol manufactures, and, unfortunately, funeral services. If you do decide to invest in these sectors, note that once the markets stabalize, you’ll want to adjust your portfolio. Some other stocks include:

What Stocks To Go For and What To Avoid Right Now

According to Brian M. Reiser from Investment U., during a crisis, there are two different investment strategies you can choose from. The first is to play the long game, meaning buying stocks that have a low value right now but will eventually, when the market stabilizes, be worth a lot more. This won’t give you anything right now, but will certainly be lucrative further down the line, it’s just a matter of when. 

An example – with gyms and fitness centers shut down right now, franchises like Planet Fitness have a low value. Now would be a good time to buy for a low price, knowing that, at some point down the line, the price will certainly go up when self-isolation ends and people want to get back into their fitness routines. 

The other option is known as short selling and it is the option that could make you money in the here and now. When you short sell, you as an investor borrow a stock from someone else and then sell it on the open market, with the plan to buy it later for less money. Short selling is based on a speculation that the borrowed stock with decline in price, therefore when you buy it back, value of the stock will be less, making you more money. 

You can also think about stocks that would be good to own now, such as Clorox and Zoom. In both of these cases, the stock has continued to go up as more and more consumers are using these products because of the global health crisis. 

Stocks that are bad to own right now are in sectors where you won’t find much happening, such as motorcycles.

This should give you a good overview of how and where to invest during a recession that could potentially be a big help to you down the line. What to learn more about investing and how it’s done? Check out our guide on Investing 101.

 
 
 
 
 
 
 
 

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