Whether you call it a business cycle or an economic cycle you’ve undoubtedly heard the term “recession” before. It’s usually followed by the looks of sheer panic and horror stories of people losing everything. The financial crisis of 2008 is still fresh in the memories of many investors, and with a 10-year bull market coming to an end, investors are looking to mitigate the effects of a bear market and dare I say a recession.
Market indicators are signalling that a change in the global market is coming soon as the stock market skyrockets, interest rates, employment and inflation all on the rise.
Is it possible to gain during a market downturn?
Let’s discuss a few tactics that have been tested and proven to work during a recession:
Update Your Asset Allocation
Investors should complete an investment policy statement (IPS) when opening an investment account, if not, you should fire your advisor immediately.
An IPS speaks to your preferred asset allocation, the problem is, it is often forgotten and not updated based on market conditions, changes in risk tolerance and goals. This can be detrimental during a recession as your 50-50 split of bonds to equities can cost you.
Right now, asset managers and advisors are recommending clients shift from active to passive investing (Funds/ETFs) as well as going overweight in equities versus bonds. This type of strategy focuses on capital preservation as the Feds increases rates and quantitative easing continues. Failing to adapt, investors may soon face the harsh realities of an unforgiving market.
Investing in “Recession Proof” Stocks
When a recession shakes the economy, people are often caught off guard, leading to knee-jerk emotional reactions.
The trick is to buy into companies with diversified revenue streams and a reputation of stable performance during these less than stellar market conditions. Bank of Nova Scotia [NYSE: BNS] has never missed a payment in 45 consecutive quarters; discount retailer Walmart Inc [NYSE: WMT] saw steady growth in 2007 and continues to outperform the industry 10 years later. Industries such as utilities & healthcare may not see as much capital appreciation but are classified as portfolio stabilisers simply because you can’t live without them.
Go Real Estate
Falling home prices during a recession is nothing new. Now buying a property during a recession is not a good practice if you are looking short term as interest and unemployment rates are high, and market sentiments are low.
You may get your dream home at an unimaginably low cost, but the question is how low can prices go? Markets can take on average 2-10 years to recover from a recession but once it does the value of these undervalued/foreclosed homes should increase, thus making you profitable.
Timing Is Everything
Recessions happen after the peak phase of the business cycle. You can identify a peak based on favourable market sentiments, stock prices upswing, growth in GDP and earnings creating financial bubbles.
This is followed by an economic downturn. GDP growth falls, massive layoffs and we enter a bear market. In 2008, the markets contracted 2.4% in Q1, rebounded in Q2 and plummeted in Q4 by 8.5%, but wait there’s more. In 2009, the markets dropped by another 5%, and unemployment reached double digits.
Recessions are a natural part of any market and should be greeted without fear. Despite the news during the 2007-2009 period, there were many winners in the stock market game, these investors positioned their portfolio to benefit from the trough and come out on top.
Will that be you?
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