Stocks That Make Money During A Recession
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The UK economy endured the worst recession on record as a result of the pandemic with GDP shrinking 20.4% between April and June last year.
But a recovery is underway. The British economy grew by 0.1% in July 2021 as England came out of lockdown and businesses reopened.
This marks the sixth consecutive month of growth, but was much lower than the 1% growth seen in June. Uncertainty still remains, meaning we can't rule out another recession.
In this article we explain:
- What is a recession?
- What does a recession mean for your money?
- Ten tips to invest during a recession
- What investments do well in a recession?
- What are the safest investments?
- How do you make money during a recession?
Read our beginner's guide to investing
What is a recession?
A country is said to be in recession if GDP (which in the value of all the goods and services produced in the UK) has fallen over two consecutive quarters.
The government restrictions imposed at the outset of the pandemic saw business close their doors and millions of workers put on furlough. This led to dramatic falls in services, production and construction.
The last time the UK fell into recession was in 2008 to 2009, following the banking crisis and financial crash. It lasted for five quarters (or 15 months).
Find out more: Coronavirus: what are your rights about going back to work?
What is a double-dip recession?
There were fears the UK may enter a "double-dip recession". This is when you have two recessions, separated by a short-lived recovery and is often referred to as a "W-shaped recovery".
They are rare: the last time the UK had one was in the 1970s, while the US has only experienced one before.
After the worst recession on record last year, the UK economy did start growing again before shrinking again in November 2020. But the country avoided a double-dip recession.
Find out more: Is now the time to start investing… and where should I put my money?
What does a recession mean for my money?
No one knows exactly what lies ahead and what the economic recovery will look like, particularly with the potential for more coronavirus strains and further lockdowns.
Investors should prepare for a rocky ride. However, the stock market still offers the greatest prospect of growing wealth for those with a long-term view, especially as interest rates on savings accounts are meagre.
Find out more: Should I buy stocks during the coronavirus crisis?
Ten rules for investing during a recession
1. Don't panic
Avoid knee-jerk reactions such as selling investments when markets are falling.
You could crystallise some hefty losses by selling out of your investments, depending on when you bought them, and potentially miss out on any recovery.
The ongoing uncertainty over Covid-19 is likely to amplify market volatility in the near future, so the key is to focus on longer-term goals and wait to ride out the inevitable bumps in markets.
2. Diversify and spread risk
Diversification is key for any investment strategy. Hold a mix of cash, fixed interest and shares. Spread across global markets too so you are not over exposed to downturns in any one area.
Make sure you are comfortable with your risk profile. This is the extent to which, in the pursuit of higher returns, you can stomach seeing some investments fall in value.
3. Keep costs low
All investment platforms charge for running your money and there are typically fees for holding funds, as well as trading costs for funds and shares.
Make sure you're not paying over the odds for your investments.
Platform costs vary so you might save money by switching to one offering better value, boosting the value of your fund.
If you're looking for a low-cost platform, we have given Fidelity and Nutmeg top marks. Find out more here.
4. Drip-feed money into investments
It is very difficult to time the market, which is where you try to buy or sell investments at just the right moment in anticipation of prices going up or down.
It is even harder in a market characterised by investor fear with increased volatility. Instead establish a regular savings habit and drip-feed your money in.
This will ensure you benefit from pound-cost averaging (where you buy more units in your investments when prices are low).
Find out: How to invest with little money
5. Choose investments wisely
If you are investing directly in shares, look for firms that have strong balance sheets and business models.
You want to find companies where demand for the product or service is relatively insensitive to the economic cycle, such as companies that provide consumer staples like supermarkets.
You might also want to invest in sectors that will prosper whatever the investment climate.
Learn more: Should I buy stocks during the coronavirus crisis?
6. Take advantage of cheap stocks
Amid a gloomy economic outlook, the stock price of investments may remain depressed. This means there could be a good opportunity to buy stocks at a bargain price.
Some fund managers specialise in looking for undervalued companies that will prosper in the future. These include quality companies in sectors that have been hit by lockdown but can weather the storm.
Find out: How to choose investment funds
7. Be patient in the wait for dividends
Turning to shares to generate income isn't as simple as it used to be, but all is not lost for investors.
Even where companies have reduced or halted payments, those dividends are likely to be resumed in the future.
Finding good dividend stocks means looking for companies that typically have no debt and plenty of cash on their books.
8. Look for safety nets
As a refuge from volatile stock markets, many investors may be considering holding more money in corporate bonds – where investors are paid interest to lend money to companies.
Elsewhere, gold is perceived to be a reliable store of value during difficult times because its performance is not tied to stock markets.
Bonds and precious metals can help diversify a portfolio and ensure your investments are not totally reliant on how the FTSE 100 or S&P 500 are performing.
9. Invest in a ready-made portfolio
Many fund supermarkets offer ready-made portfolios, which aim to have a sensible spread of investments, including non-stock market assets such as bonds and property.
Many are labelled according to your risk tolerance. Ensure you are comfortable with your chosen risk category as there are no standard definitions of what a "balanced" or "cautious" portfolio means.
If you're looking for a ready-made investment portfolio, we have given Nutmeg top marks. Find out why here.
You could opt also for a one-stop-shop multi-asset fund with a dedicated fund manager which promises built-in diversification.
10. Take comfort from the past
Economic downturns do not last forever. If you have an investment horizon of five years or more, you should be able to benefit from the market recovery.
Shares have delivered higher returns than cash deposits in over 76% of all the five-year periods since 1899, according to the Barclays Equity Gilt Study.
If you're shopping for a self-invested stocks and shares ISAs, Vanguard has been given top marks from us.
What investments do well in a recession?
The best-performing assets in a recessionary environment are those that are not highly leveraged. That is, they don't have a lot of debt compared to their assets.
Those companies that have too much money tied up in risky projects also run a risk of going bankrupt.
You should opt for companies where their business is not determined by the economy.
For example, healthcare is often seen as recession-proof as it is expected to be in receipt of considerable investment over the next decade.
In industries that were the worst affected by the pandemic, those businesses that did the best were those that entered the current climate with strong balance sheets.
Read our guide to investment trends
What is the safest investment during a recession?
Choosing funds that track stock markets such as the FTSE or S&P 500 are always a popular way to invest at any time but especially so during a recession.
With index funds you aren't betting on individual companies but on the long term success of global business.
How you invest during during a recession can be just as important as what you invest in, so its important to stick to the tips mentioned above.
Find out: How to choose investment funds
How do you make money during a recession?
Investors need to be cautious but alert in monitoring the markets during a recession.
There will be opportunities to pick up high-quality assets at discounted prices as businesses are temporarily affected by the situation. Difficult environments are often where the best opportunities can be found.
Look at companies that maintain steady business models and strong balance sheets during a recession.
Examples include utilities and companies that make basic consumer staples and goods.
If you're shopping for a stocks and shares ISA, we list the top ones here.
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Stocks That Make Money During A Recession
Source: https://www.thetimes.co.uk/money-mentor/article/invest-during-recession/
Posted by: steelhavive.blogspot.com
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