With a recession looming, many investors wonder what asset classes they should invest in for maximum protection in times of high inflation and economic uncertainties.
We spoke to a few experts and asked them “what asset classes are most interesting during a recession?”
Read on to see what they had to say!
Franchise Investments Can Be a Good Option
Kenny Rose, Founder and CEO of FranShares, says:
“During a recession, it is important to rebalance your portfolio into alternatives that are real assets and are not directly correlated to the markets to retain value and hedge against inflation.
It can be even tougher to find ones that also provide cash flow.
During a recession we can expect the most resilient asset classes will be those that provide essential services despite the economic conditions, this being franchises.
Many franchise industries provide essential services that will continue business as usual even as the stock market falls.
People will still get haircuts, go to the gym, take out their trash, and find comfort in food when a recession hits.
By investing in franchises investors are supporting their local economy and even hedging against inflation because income-generating real assets, like franchises, naturally increase their prices as inflation rises. “
Long-term Investments are a Solid Choice
Gideon Drucker, Director of the Wealth Builder division at Drucker Wealth, tells us:
“If you’re a long-term investor, then the best vehicles to invest in during a recession are the exact same as those to invest in during a booming economy…assets that will outpace the rate of inflation over a long enough (10+ years) period.
As mainstream equities/stocks inside of a diversified and balanced portfolio have consistently led to returns higher than inflation over time…and therefore has adequately protected your purchasing power…this is my unambiguous answer.
Again, if you have an investing time horizon greater than 10 years…the only risk of investing in the stock market during a recession, historically speaking, is that you pull out and are no longer invested when the economy and the markets inevitably recover.”
Real Estate is One Asset Class to Consider
Faruq Darcuiel from Acropolis says:
“Real estate can serve as an attractive asset class even in times of inflation or recession. Real estate remains a popular hedge against inflation and is a staple of long-term investing and wealth in America.
On top of that there is still great potential in rental income. Rents have skyrocketed in recent years and during the last recession, rent rates remained steady relative to other areas that saw significant depreciation.
The one thing to monitor will be unemployment rates. In a scenario where we see unemployment rise significantly, it could exacerbate a worse crash in both the retail real estate and rental market.
All that said, it likely just means being more sensitive on timing when to deploy your strategy given the market and your personal financial situation.”
Real Estate Can Make Money in Volatile Markets
Steve Davis, CEO of Real Estate Education Center, says:
“Apartments are the most recession-proof investments out there, therefore making this the perfect time to start real estate classes. While apartments may lose value, the cash flow remains the same.
In 2008, I was invested in over 4000 apartment units.
When the recession came, my property values dropped 20% or more. Did I care? No. I still had my cash flow. In fact, the cash flow went up since so many people were losing their homes and moving into apartments.
Real estate makes money in both the up and down markets allowing you peace of mind in any economic environment.
I also added to my portfolio during the recession because real estate prices were so low. So, remember, it is not if a recession is coming, it is when. You need to have your money somewhere that it doesn’t matter.”
Investors Might Consider Industrial Real Estate as Well
Doug Amis, President and CEO of Cardinal Retirement Planning, Inc., explains:
“More affluent investors that can afford to participate in industrial commercial real estate should feel at ease even during the worst of a recession.
Unlike retail commercial real estate, industrial properties can offer a better hedge against rising prices.
Unfortunately, this hedging benefit is lacking when we compare REITs and direct investments in CRE. It is not for all risk tolerance for all investors, but these need to be managed as part of a holistic financial plan.”
Investors Can Get Creative with Real Estate
Doug Greene from Signature Properties says:
“Hands down, the best investment in a recession is going to be real estate. I know, I know, you were probably looking for some untapped opportunity in a niche investing segment but the reality is that real estate generates strong returns coming out of recessions time and time again.
In addition to appreciation of real estate investments, you also benefit from tax write-offs, principle pay-down and monthly cash flow.
There are many creative elements to real estate that can make it a “sexier” investment than it would seem on the surface. I would suggest creative financing of real estate to be a tool that positions an investor really well during a recession.
Another more speculative investment for this recession in particular are cryptocurrencies. Are they just going to go away? I don’t think so.
We’ve already adopted blockchain technologies and forward-thinking crypto use cases in many industries and markets. Be selective in what you invest, though. Go for bigger and stronger coins with strong business cases like bitcoin and ethereum.”
Commodities Are Another Way to Go
Derek Fossier of Equitas Capital Advisors says:
“In times of recession, we are looking for non-correlated assets, ones that can hold up regardless of the strength of the market.
Commodities from precious metals to oil, and the companies involved in bringing them to market, can offer diversification in an inflation environment. So can hedged strategies, which come along with their own risks.
A cash or short-duration fixed income position can be put to work as opportunities arise. Income producing assets like real estate (REITs) or oil pipelines (MLPs) that offer income along with capital appreciation are also worth a close look.”
Cash is Key
Ricardo Pina from The Modest Wallet explains:
“Cash is an important asset when it comes to recessions. In case you end up in a situation where you need to pull from your assets, it really helps you to have an emergency fund to fall back on.
Typically, an emergency fund should cover three to six months worth of expenses, such as, utilities, food, medications, rent, and minimum debt payments.”
Bonds are Also an Option
Daniel Foley, SEO Manager at Manhattan TechSupport, tells us:
“A recession does not suggest that investors should go home and sit idle. There are, however, certain supposedly “safe-haven investments” that can aid in lowering portfolio risk.
But I think investing in these assets now is crucial, rather than waiting until a recession hits.
Investors must act now to avoid the recession because markets devalue the future. Bonds with a short maturity of around two years and a large amount of cash would provide protection.
It’s essential to take action before a recession hits to safeguard savings. To safeguard their portfolios against rising consumer prices.
Having a strategy before a recession is more important. It is still true today that Noah didn’t even wait for it to start pouring before he constructed his ark.”
Diversification is Ideal
Mathew Bowley, Marketing Manager at Solmar Villas, explains:
“Another method to lessen the risk of significant losses during a recession is to have a well-diversified portfolio.
The wise advice is to create a well-diversified portfolio that includes equities, fixed income, private equity, real assets, and alternative investments in order to weather the volatility.
It’s vital to keep in mind that traditionally, the tech-heavy Nasdaq usually underperformed during recessions, despite the fact that many investors have rushed to high-flying tech equities and exchange-traded funds in recent years.
Over a few years after the dot-com bubble, the index dropped more than 80%, and during the Great Recession, it dropped 46% from November 2007 to November 2008 alone.
Therefore, concentrating on diversification and seeking out alternatives to minimize losses may make sense.
Losses can be minimized by having a well-diversified portfolio containing reputable equities, safe fixed income, such as U.S. Treasury securities that are inflation-protected, and diversifiers like real estate or other options for qualified investors.”
Final Words: What Asset Classes are Most Interesting During a Recession?
There are a few various asset classes our experts recommend during a recession. The most popular investment appears to be real estate, but other classes such as commodities, long-term holdings, and even cryptocurrency are one the radar of some.
No matter what you decide to invest in, or when, you should always speak with a qualified financial advisor in order to best protect your wealth.