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November 20, 2022Historically, we’ve experienced a recession every five to ten years since the 1900s. This might not seem like it if you’re not close to the stock markets, but it is. Obviously, some have been worse than others, and we only tend to remember the terrible ones.
However, if you’re a shrewd investor, you know that investing and making money doesn’t take a back seat, no matter the conditions. And all you have to do is know where opportunities exist and how to capitalize on them. But this is easier said than done, as every recession is different and comes with its own intricacies. And a wrong move can leave you with “something” in your hands.
This article will look at how you can plan your investments during recessions and what to consider to be most successful. So keep reading to learn more. Also, please remember to research the industry before you get started so that you know that you’re using trading and investment apps available.
High-risk Investments in a Recession
As an investor, understanding what opportunities to avoid during a recession is as crucial as knowing which ones to go for. This can make all the difference between coming out on top or losing most or all of your investment, if not all. The highest risks come from companies that are overly in debt, ones that stock is too cyclical or speculative.
- Companies With Large Debt
It would be prudent to avoid investments in overleveraged companies during a recession. Such companies usually find keeping up with their overheads and rising interest rates in these low cash flow periods challenging. Furthermore, there is also a high likelihood that their debt-to-equity ratio may skew on the wrong side of the scale, which can cause a drop in shareholders’ value or, worst-case scenario, bankruptcy. Situations you’d be better off avoiding.
- Cyclical Stock
Cyclical stocks come from nonessential companies, like luxury goods, that experience high returns with high consumer confidence but take a battering in recessions. Stocks from companies, such as luxury cars or clothes manufacturers, tend to do well when consumers have a lot of disposable income but are also some of the first things they cut when not. It would be best to avoid these investments during a recession and only take them up when the market is in recovery.
- Highly Speculative Stocks
Speculative stocks are some of the worst-performing stocks during recessions because their value is mainly based on optimism and investor sentiment. However, sentiment and optimism are the first things out the door when the rubber meets the road. Therefore, hoping a stock will do well during a recession is one of the worst investment mistakes you can make.
Investments That do Well During a Recession
Now that you understand what does not work during a recession let’s see what key indicators successful investors look for in these periods. It can also be tempting to sit out on investments during a recession, but as some wise person once said, fortune’s favor the brave.
- Companies With Strong Balance Sheets
Look for investment opportunities in companies that are well managed, have low debts, healthy cash flows, and are profitable. Historically, utilities, FMCGs, and defense companies have shown to have strong balance sheets during recessions and fare reasonably well. In addition, companies with a strong balance sheet are also least likely to be overburdened by their debt obligations as overleveraged ones would.
- Companies in Industries That are not Affected by Recessions
Yes, there is such a thing as recession-resistant industries. But if we were you, we would not jump out of our seats until we heard what they are. These industries include consumer staples such as groceries, alcohol, and cosmetics. However, they also include industries like firearms and funeral services. It turns out funeral directors are even more aggressive during recessions.
Nonetheless, stocks in such companies tend to rise because consumers tend to go for more reasonable, less expensive brands. Many investors also tend to inject capital into such industries during these periods, which helps them grow.
- Wait for the Recovery Period
And yes, we know what we said at the beginning of this section of . But there is nothing wrong with playing it safe and waiting for the waters to calm before you make your move. The start of the recovery is an excellent time to sweep up rising stocks in companies you’ve been eying and ride out the wave till the next recession.
Conclusion
Trading can either be easy or hard. But we’d like to think it’s easy. However, we’re not going to tell you how to go about your trading strategy, but we will urge you to take some of these principles to heart. They might be the thing that helps you make out of the next recession better than when it starts.
