How to Invest Ahead of a Recession

Market predictions often aren't accurate, and it's seldom wise to attempt to time your investments to match the whims of market movement. However, if all signs point to a recession on the horizon, there are things you should do to strengthen your portfolio and your own financial standing so you'll minimize your losses during the downturn. With careful planning, you might even manage to make some money. Work with your broker to balance your portfolio and make investments that go beyond your country's borders.^[1]

[Edit]Steps

[Edit]Rebalancing Your Portfolio

1. Sell weaker stocks when prices are high. If you have underperforming stocks in your portfolio, look at their past value and go ahead and trade them when the price is relatively high compared to what you bought them for or what they've traded for in the past. You may not make much of a profit, but if there's a recession looming, you don't want underperforming stocks in your portfolio. If those companies weren't doing well before the recession, they'll likely do even worse during the recession.^[2]
   
   • Check with your broker before selling off too many stocks. Some firms charge additional fees to investors who hold high cash balances.^[3]
2. Move some of your investments into bond funds. Because government bonds carry little to no risk, they're strong investments to hold during a recession. While you likely won't make a significant profit, you don't have to worry about losing your money, which is a risk with any stock during a market downturn.^[4]
   
   • Bond funds invest in many different types of bonds, so they're automatically diversified. You might also consider municipal bond funds, which are issued by local governments.
   • Corporate bond funds generally have potentially greater returns, but they also entail greater risk. However, corporate bond funds are still less risky than investing in most stocks during a recession.
3. Invest in food, raw materials, and energy sources. Because these commodities are traded globally, a recession in one country won't necessarily impact the demand for them. This keeps the value relatively steady. Some commodities, particularly basic raw materials and food, may even increase in value during a recession.^[5]
   
   • A recession in one country may not even affect the demand for some materials on a global scale. Good commodities to invest in ahead of a recession are raw materials such as gas or wood, which developing countries, in particular, consume a lot of.
   • Grains, such as rice and wheat, are also good staples to invest in if a recession seems imminent.
4. Place a trailing stop-loss order to minimize your risk. With this kind of order, you choose a price that you're comfortable with and your broker will automatically sell the stocks you specify if their price drops below that level. This can help you minimize your losses during a recession, especially if you've decided to hold on to riskier stocks.^[6]
   
   • Research the performance of the stocks you're still holding so you know where to set the price for your stop-loss order.
   • You might also look at what you initially had invested. For example, suppose you bought 100 shares of a company when the stock was priced at $10 a share. Today, the shares are trading at $50. In that situation, you might want to set your stop-loss order at $15. If the shares dip that low, you won't have to worry about continuing to lose any money, but you'll still earn a little off of your investment (and a little is better than nothing).
5. Plan on buying index funds when markets are low. Use some of the cash you generated when you sold off underperforming and high-risk investments to take advantage of low prices when the recession hits. Index funds, which track a market index such as the S&P 500, are relatively low risk, so you'll profit off of them when the market starts to pick back up as the recession ends.^[7]
   
   • If you have a full-service broker, talk to them about your plans. They'll help you identify undervalued funds that you could potentially make a profit on when the market rebounds.

[Edit]Buying Recession-Resistant Stocks

1. Look for companies with little debt and strong cash flows. In a recession, a company with a strong balance sheet will perform better than one that has taken on a lot of debt. A highly leveraged company was losing money before the recession hit and that trend will likely get worse.^[8]
   
   • Look closely at the amount of debt a company is carrying. If the company becomes unable to make its debt payments and is unable to handle the costs of continuing operations, it may fail.
   • Some stocks from established companies with strong balance sheets also pay profits to shareholders in the form of dividends. These stocks can generate a little passive income, even during a recession.^[9]
2. Avoid brands that decrease their marketing ahead of a recession. When a recession is looming, some companies cut costs by lowering their advertising budgets. However, if companies don't advertise during a recession, demand for their products tends to decrease. These companies may fail to bounce back even after the recession is over.^[10]
   
   • Research the ad spending of companies you're interested in on the internet. If you notice a significant decrease, that may be a sign that the company is looking inward over the course of the recession rather than trying to expand and attract new customers.
   • If you watch TV, pay attention to the products and brands that are advertised and how frequently those ads run. A company with heavy prime-time advertising may be worth looking into, especially if they sell a more basic, commonly used product.
3. Invest in consumer staples that people will always buy. Regardless of the economy, there are some things that families will always need to purchase. Foods, household goods, and feminine hygiene products can be strong holdings during a recession.^[11]
   
   • Keep in mind that when family budgets get tight, consumers may steer away from name-brand products in favor of cheaper generic versions of the same thing. Investing in household basics is no guarantee that you won't lose money when the recession hits.
4. Diversify across multiple sectors. While it's smart to keep to core sector stocks, you still want to ensure that your portfolio remains balanced during the recession. In addition to staples and basic household goods, include stocks in healthcare and utilities. Like household goods, regardless of the market, people will still get sick and people will still turn the lights on — so these sectors will remain in steady demand.^[12]
   
   • For example, if 20% of your portfolio is made up of stock holdings, you might invest a third of that in utility stocks, a third in healthcare, and a third in consumer staples.
5. Invest in real estate when prices drop if you have experience. Many investors are afraid of real estate when a recession hits. However, if you're an experienced real estate investor, buying real estate when prices are relatively low can expand your portfolio by giving you the opportunity for passive rental income during the recession and increased equity when the market recovers.^[13]
   
   • Make sure the property is ready to rent out and won't require additional investment on your part, because you have no way of knowing what the property will be worth when the recession ends.
   • If you already own a second property, such as a vacation house, you might also consider renting it out to earn income from it.
   • Hiring a property management company to deal with the day-to-day aspects of renting can make being a landlord less of a hassle. However, you might want to stay away from real estate investments entirely if you have little to no experience managing real property.

[Edit]Improving Your Financial Health

1. Pay down your consumer debt. If you're carrying a lot of debt on credit cards, try to eliminate as much of it as you can before the recession hits. That debt will end up costing you more money when the market's slow and money is tight.^[14]
   
   • If you've made money selling underperforming and high-risk stocks, you might use some of that to pay down or even pay off your credit cards.
   • Don't close credit card accounts if you've paid them off. Doing so will lower the amount of credit you have available, which could, in turn, lower your credit score.
   • After you pay off cards, keep them active by using them for small purchases and paying the balance in full each month. For example, you might use a credit card to automatically pay your mobile phone bill, then pay the credit card balance when it comes due each month.
2. Check your credit report for errors. Get copies of your credit report from each of the reporting bureaus and analyze the entries. If something looks unfamiliar or doesn't match your records, it might be an error. Disputing errors on your credit report may increase your credit score.^[15]
   
   • While there are companies that will complete the error dispute process for you for a fee, you can do it yourself for free. Most credit bureaus allow you to start a dispute online, or you can call their toll-free customer support number.
   • You might also bring the issue to the attention of the creditor that posted the entry. They may be able to fix it more quickly than the credit bureau can.
3. Renegotiate or restructure high-interest loans. If you have a good credit score, you may be able to get a better deal on some of your more high-interest loans. Restructuring or refinancing makes sense when a recession is looming because it means you'll be paying less in interest when your budget gets tight.^[16]
   
   • If the recession hits you particularly hard and you find that you need to refinance a loan, you'll likely find that it's much harder for you to do so. If you can't pay off those loans, talk to the lender about lowering the interest rates before the market enters a recession.
4. Cut unnecessary expenses from your budget. Take a look at your monthly expenses and see what you can eliminate before the recession hits. If you already have a lean budget, you won't have to worry as much about making ends meet if the recession impacts your own finances.^[17]
   
   • For example, if you have subscriptions to 3 different streaming services, you might consider cutting down to 1 that you watch the most.
   • Unnecessary expenses may also include insurance policies that aren't legally required and don't actually protect you from anything major, such as collision insurance (if your car is paid off) or accidental death insurance. You can eliminate many of these policies.^[18]
5. Build up your emergency fund. Make sure you have at least 6 months of living expenses set aside in a savings account before a recession. You never know what might happen during a recession or how bad it will get before the markets rebound.^[19]
   
   • For example, if the recession puts a squeeze on your employer, they may have to restructure or downsize their workforce. If you end up unemployed during a recession, you want to make sure you can still make ends meet — especially since it might take you longer to find a job during dismal market conditions.
   • Look at your budget and calculate how much your living expenses would be for 6 months. If you don't have that much money in savings, temporarily adjust your budget so that you're putting more money into savings until you have at least that much available.

[Edit]References

1. ↑ https://www.bloomberg.com/opinion/articles/2019-06-17/how-to-invest-and-profit-in-the-next-recession
2. ↑ https://www.bloomberg.com/opinion/articles/2019-06-17/how-to-invest-and-profit-in-the-next-recession
3. ↑ https://www.ft.com/content/952d9c50-c405-11e9-a8e9-296ca66511c9
4. ↑ https://www.investopedia.com/articles/mutualfund/08/recession-proof-mutual-funds.asp
5. ↑ https://www.investopedia.com/articles/08/recession.asp
6. ↑ https://www.forbes.com/sites/garrettgunderson/2019/06/01/in-the-next-recession-you-can-make-money-rather-than-lose-it/#7ed3b0664028
7. ↑ https://www.bloomberg.com/opinion/articles/2019-06-17/how-to-invest-and-profit-in-the-next-recession
8. ↑ https://www.investopedia.com/articles/08/recession.asp
9. ↑ https://smartasset.com/investing/5-things-to-invest-in-when-a-recession-hits
10. ↑ https://www.investopedia.com/articles/08/recession.asp
11. ↑ https://www.investopedia.com/articles/08/recession.asp
12. ↑ https://smartasset.com/investing/5-things-to-invest-in-when-a-recession-hits
13. ↑ https://smartasset.com/investing/5-things-to-invest-in-when-a-recession-hits
14. ↑ https://www.bloomberg.com/opinion/articles/2019-06-17/how-to-invest-and-profit-in-the-next-recession
15. ↑ https://www.bloomberg.com/opinion/articles/2019-06-17/how-to-invest-and-profit-in-the-next-recession
16. ↑ https://www.forbes.com/sites/garrettgunderson/2019/06/01/in-the-next-recession-you-can-make-money-rather-than-lose-it/#7ed3b0664028
17. ↑ https://www.marketwatch.com/story/brace-yourself-take-these-10-steps-right-now-to-prepare-for-a-recession-2019-08-21
18. ↑ https://www.forbes.com/sites/garrettgunderson/2019/06/01/in-the-next-recession-you-can-make-money-rather-than-lose-it/#7ed3b0664028
19. ↑ https://www.marketwatch.com/story/brace-yourself-take-these-10-steps-right-now-to-prepare-for-a-recession-2019-08-21