Investing during a recession can be complex. Negative economic forecasts and investor sentiments cause markets to become increasingly volatile, impacting everything from picking the most successful ETF to the market value of leading shares and indices.
The best long-term investing advice is to go back to basics, focusing on diversification to mitigate risk exposure and selecting sectors with reduced vulnerability to recession.
Many investors also look for tips from sources such as Motley Fool to navigate uncertainty. Does Motley Fool Stock Advisor work just as well during tricky trading periods? Stock Advisor looks at larger cap stocks with long-term growth projections, including blue-chip stocks, so it can be a good reference point even in a recession.
How Does Recession Affect Investment Returns?
During a recession, GDP drops–the technical indicator is that two successive quarters with reductions in GDP result in a recession. Although this may be a natural part of the economic cycle, it can cause untold pressures on markets and stocks.
However, a recession can present an opportunity. While markets might experience negative returns due to low earning capacity, they often recover long before the rest of the economy course corrects.
Some sectors are defensive because they focus on goods or services that retain high demand regardless of high-interest rates or the broader economic outlook. These include:
- Financial services
- Food and drink
- Utilities
Resilient market segments rely less on discretionary spending, whereas cyclical sectors, such as automotive and aviation-linked assets, are considerably more likely to be impacted by the recession.
Avoiding Investment Risk During Inflation
The right investment strategy depends on your position and will differ between investors looking to maintain portfolio growth and returns and those selecting new opportunities. Investing in well-managed stocks, assets, and funds with solid capital, good cash flow stability, a robust balance sheet, and low debt exposure is normally the best approach.
Drops in the markets can also present an advantage. Investors can expand their portfolio at a lower entry point or with a smaller capital investment, provided they choose their timing carefully and when markets are at a low.
Choosing the optimal time to invest can be difficult to judge without in-depth insights and fundamental and technical analysis. Working with an experienced fund manager can be beneficial for investors without the expertise to make clear assessments based on past price movements, forecasts, and trends.
The key is usually to avoid any stocks or financial instruments which are highly speculative because a lack of market optimism is normal in a recession, which means these investments are very likely to perform badly.
Assessing Investment Strategies During Recession
A long-term investment approach won’t always need to be entirely revised because of expected or current recession. If your objective is capital preservation and wealth accumulation, it may be worth riding the waves of uncertainty until markets settle.
Seasoned investors plan for recession but focus on broader trajectories and market performance rather than making sudden and often inadvisable decisions based on sudden fluctuations. Recession always, inevitably, reverts and isn’t a position that will remain indefinitely, so by ensuring your strategy is based on secure assets and avoiding any of the stocks or products more exposed to a weakened economy, you stand to come out of the other side with your investments intact.
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