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3 Tips On How To Invest In A Recession
Last Updated on: November 7th, 2024
Investing is growing in popularity as a way of making money on our savings, whether in the short or long-term.
There are many apps and websites available that are making investing more accessible to people of all ages and experiences, as well as having access to an investment research platform so you can make informed, and sensible decisions with your money.
In 2022, we are set to see inflation skyrocket and the economy shrink, which has led to economists forecasting a recession. This makes navigating the stock market trickier ? how do you know what to do for the best when the economy is in trouble?
Below, we?ll take a closer look at how a recession would impact assets and the stock market and discuss 3 tips to help you invest during economic difficulty.
What Happens To Investments In A Recession?
When the economy recedes, many businesses in a range of sectors will begin to feel the pinch. A recession happens when sales of all kinds decrease, this is usually due to rising prices.
This can have a hugely negative impact on the economy as a whole and means that businesses will struggle to stay afloat and will have to do all they can to reduce costs.
It may lead companies into debt and will have a detrimental impact on profit too. When it comes to investments in a recession, stock prices will nosedive, as the market becomes volatile. Because of this, investors will panic, and pull money out of their stocks entirely, which worsens the situation.
Here Are 3 Tips On How To Invest During This Time:
Whether you?re a new investor or a seasoned professional, it is always best to know how to manage your investments in times of recession.
1. Know your risks
Researching which assets to steer clear of as an investor is just as important as knowing which investments are best. The type of stocks, assets, or companies that you should stay clear of during a recession is those that are speculative or leveraged.
You?ll find that leveraged companies have a lot of debt and will suffer as the economy dips with high-interest rates, and lack of revenue, making it even more difficult for these companies to make repayments ? the likelihood of bankruptcy is high with leveraged companies so you should think twice about investing in them!
Speculative stocks are mostly based on optimism alone, which dwindles when a recession hits, so these stocks tend to be the worst performers. Check VectorVest to learn more about stocks and investing.
2. Research where is best to invest
You should do your research to prepare for every eventuality when it comes to investing, including a recession.
Look for stocks that do well when the economy is in a downturn, like companies with strong balance sheets that have low levels of debt and a healthy cash flow, or look for recession-resistant industries, like grocery shops, discount stores, and cosmetics ? these are essentials that people need, recession or not.
They are what you?d call counter-cyclical stocks, investments that tend to go the opposite way to the economy, so investing in them means you may even do well during an economic downturn.
3. Adjust strategies in recovery
When it comes to economic recovery, you?re going to need to adjust your investment plans to suit the changing market. As the economy recovers and spending stabilizes within all sectors and industries, those stocks that you were once avoiding, bounce back.
Investing in speculative stocks when the economy recovers could be advantageous as optimism within the market increases, and those counter-cyclical markets will not be doing so well.
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