How to invest during a recession

Having the right mentality

Recessions are periods of time when people become afraid that they will not have enough money to live the way that they are used to living or that a pending recession most certainly means that they will loose the money that they have worked so hard to earn. It is true that for many people a recession brings unfortunate news and some cuts to the job market which could mean the loss of jobs and the stagnation of business growth. But you must remember that although a recession may make these unfortunate events more likely, they are not guaranteed and certainly not everyone will be directly affected. In fact some areas of the market see no effect at all.

The key to investing during a recession is therefore to start off with the right mentality. Do not panic. Yes recessions can be scary, but they also lay the groundwork for opportunities in the future. Interest rates fall and it becomes less expensive to borrow money. Cost-cutting processes can teach a company to become more innovative and competitive. The lower demand for products and services brings down the effects of inflation. Stock market timing is not exact, but chances are that if you invest during a recession, once the market has recovered you will benefit from the increase in price that your investment will bring by way of profit when you do decide to sell.

You must be patient during a recession are carefully consider where you want to put your money rather than if you would like to put your money somewhere. Go ahead and continue shopping for bargains. Just as there are department store sales, the stock market has stocks that are sold at a price that could be considered "undervalued" and when the recession is over, you will be glad to see all the money that you saved. In a study by Standard & Poor they analyzed stock performance in the late stages of recessions dating back to the mid-1900s. The study found that, "in general, stocks in certain sectors -- in particular, financials, consumer discretionary, information technology and industrials -- tend to do best during a recovery." Of course the effects of a recession are never identical and some of these market sectors may do very poorly once the recession is over. But the point remains the same, that there are areas of the market that can yield great financial benefits in the future if invested in during a recession.

Stocks and bonds

For some the topic of stocks and bonds is intimidating enough. Adding in the factors of a recession then becomes too much for some to handle and that is why fewer people invest in the stock market during a recession than in times of economic prosperity. But those who have been investing long enough to see how the market dips and rebounds knows that an economic slowdown or even a full-blown recession don't necessarily mean it's time to cash in your remaining stocks and safely store your money away to be used only when it is safest. Instead, this time of recession should be a time to re-evaluate your long-term investment strategy.

Let's start with a brief review of bond investments. According to one prominent financial planner, "Now (during a recession) is an especially good time to consider bonds, some planners say - perhaps for as much as 20% of assets. There are a lot of reasons for investors to reconsider their stock-to-bond balance."

Investors who are willing to take a greater risk in the hopes of receiving a higher return may want to consider buying into a junk-bond fund. Recent history (1991) has shown that junk-bond investors have earned their best returns on their investments the year after the junk-bond market bottoms out. The impact of declining interest rates is magnified in its appeal on the junk-bond market because high-yield bonds carry much higher rates than other kinds of bonds. Declining rates make those high yield bonds that much more attractive, which tends to raise the price of the bonds that pay them.

Playing it safe and keeping your investments in an interest-bearing money-market account is nothing to be ashamed of if you are looking to invest during a recession. Risky investing is not for everyone. Individual circumstances warrant careful judgment on a case-by-case basis. Chances are that you are not going to get rich off of your money market investments, but in most cases you are not investing in these safer accounts to get rich, you are investing to ensure that you maintain the value of the money that you invest.

General rules for stock market investing during a recession

Those who are investing in the stock market should also have at least some faith in the long-term potential of the U.S. financial system. Long-term investors know that it is not so important where the market is now as it is important where stock prices will be 5, 10 or 25 years in the future. As far as long-term investing is concerned, those who are contributing small amounts on a regular basis have no reason not to continue doing so during recessionary times. Below are some general rules that may help the average investor make better investment decisions during times of recession.

• Don't let the increased awareness of uncertainty that a recession brings, discourage you from moving forward with your investment decisions.
• If you trade stocks, be careful how you do it. Do not make trades based on impulses or surges of emotion.
• Diversify your portfolio and go international with your investments. Invest in treasury bonds, corporate bonds, money market accounts, and CD's before you start investing aggressively in the stock market. Be sure that the stocks that you do choose to purchase have a high likelihood of still being around in 20 years.
• Defensive maneuvering in the stock market may help you to feel better about how you are handling your money, but it is not the way to see significant returns.
• Make sure you have enough cash once you have decided what to invest. As an investor, you want to be sure that you have obtained a healthy balance between liquid assets and less liquid assets. Do not put yourself in an overly compromising situation because you really want to take a gamble at the stock market.

Real estate

During a recession, interest rates are typically at their lowest. This means that it will cost the average person less money, in terms of interest payments, to make large purchases. Among the largest of purchases is the purchase of a home of piece of investment real estate. As the demand for homes tends to decrease during a recession, sellers are forced to lower their asking prices in order to be more appealing to buyers. This lower asking price is also a monetary advantage to the individual looking to invest in a home or to buy a home and hold on to it long enough to have the market rebound and then sell that home for an easy profit.

In speaking of the current recession, the National Association of Homebuilders (NAHB) Homebuilders Index shows that the slowdown in housing has now reached significant levels. The NAHB is responsible for producing the Housing Market Index (HMI) which is a weighted, seasonally adjusted statistic derived from ratings for present single-family sales, single-family sales in the next six months, and buyer traffic. According to the HMI, a rating of 50, or an optimal level for those in the sale of real estate, indicates that the number of positive or good responses received from the builders is about the same as the number of negative or poor responses. Currently, the weighted rating is at about 32 meaning that builders have a pessimistic outlook for real estate in the next six months, which in turn is not good for their stocks, but it could mean great things for the buyer who is left holding all of the cards in the transaction.

New home sales have seen a steady decline in value during the recession, but that is by no means the only indicator that those looking for an investment opportunity should use to base their decisions off of. Buying a new home that is currently undervalues simply because of the status of the market can be a brilliant investment move. But just as is the case during times where we are not in a recession, certain homes and pieces of property hold their value much better than others. Again, careful consideration and wise decision making is always something you want to be sure that you remember.

Conclusion

For many the best advice for how to invest during a recession is simply to not be afraid of the perceived risks. Investing is risky no matter what the market is doing. Some people can make a lot of money in the stock market, while others play it safe, invest over the period of a few years and end up with just a little more money than what they started with. The fact that we are or are not in a recession simply changes the details of investing, not the fact that you should or should not continue your financial planning strategy.