Recessions Can Provide Good Investment Opportunities. Just Ensure You Avoid These Pitfalls
You might think an economic downturn is not the best time to invest your hard-earned money. However, recessions often provide excellent opportunities.
Of course, as with investing at any time, you should ensure you minimise the risks to your investments during a recession. Check out these common mistakes people make when investing during a recession.
3 Investment Pitfalls to Avoid During a Recession
The official definition of a recession is when Gross Domestic Product (GDP) drops for two consecutive quarters. During a recession, economic activity drops, production and sales decline, and the stock market falls.
It is the latter of these that provides the opportunity to take advantage of lower-priced stocks. However, you should avoid these three investment pitfalls:
- Don’t Put Investments Ahead of Savings
Regardless of the potential gains, a recession is not the right time to place all your eggs in one basket. Before considering investments, you should concentrate on growing your savings to provide a safety net.
A recession is a time of uncertainty that injects significant market volatility. Therefore, delay your investments until you have an emergency fund of 3-6 months’ worth of living expenses.
If you are over halfway to achieving this amount, you might consider putting a little into your investments. However, don’t go too far until you have the security of an emergency fund.
- Don’t Invest Unless You Can Leave Your Money Alone
Even though you find a stock at a historically low price, its value could decline further during a recession. Therefore, be prepared for your investments to dip, even after an initial jump.
It would be best to consider your recession investments a long-term endeavour. As such, you should plan on leaving your money alone for several years. This long-term approach will give your portfolio sufficient time to weather the recessional storms and see some growth.
- Avoid High-Risk Investments
Recessions can render certain stocks so unstable that the companies risk bankruptcy. Although you can buy such stocks at a rock-bottom price, doing so means you risk losing all your investments.
Examples of these are cyclical stocks, including hotels, furniture dealers, luxury goods providers, cruise lines, etc. When the economy is downturned, spending on such items tends to slow, devaluing the company’s stock value.
Instead, consider non-cyclical stocks. These, also known as defensive stocks, tend to perform well even during a recession. Non-cyclical stocks include food retailers, energy providers, pharmaceutical companies, and other companies satisfying basic needs. As such, they are a good investment during a recession.
Another risky investment is a highly-leveraged company. These firms have high debt levels and high-interest loans. The burden these put on the company can force it into bankruptcy. Therefore, you could lose all your money if you invest in one of these companies. Investing is also an important part of how your pension works. Getting professional and regulated financial advice will help you with planning for your retirement, check out Portafina.
Recessions can offer some excellent opportunities for getting significant returns on your investments. However, they also present a risk of losing your money. Hopefully, this article has informed you about three common mistakes people make when investing during a recession.