Investing — Recession — Stock Markets

Five Simple Investing Strategies You Should Consider For Surviving A Recession

Photo by Brett Jordan on Unsplash

These past years, markets rose over and over again. Then, in early 2020, COVID-19 pandemic spread across the world, leading to stock markets crash. The party was over, right? At first glance, no, but it was only the first of a long series of unfortunate events. These days, fears of an economic slowdown arise. Should we fear a recession in the near future? No one knows, but every investor can prepare now. Here are some simple tips that will help you to navigate the next economic downturn and weather the storm.

But First, What Is a Recession?

A recession is defined as a period of decline in economic activity, affecting the entire economy and lasting more than a few months. Therefore, a recession isn’t a stock market correction nor a market crash. But these could be warning signs of financial and economic difficulties that could, ultimately, lead to a recession.

Economic cycle
Although harmful, keep in mind that a recession is a normal stage within every economic cycle. Where are we now, exactly ? No one knows, but with Covid-19, supply chains disruptions as well as economic slowdown in China, evidence is piling up that peak is behind us.

In other words, the economy struggles, people lose work, company’s businesses decline and the overall activity output declines. Economists generally believe that the onset of a recession is identified when the growth rate of gross domestic product (GDP) is negative for two consecutive quarters (or six consecutive months). And guess what? US GDP growth rate contracted an annualized 1.5% on the quarter in the first three months of 2022.

Quarterly GDP evolution of the United States of America, since July 2019.

Why Choose Recession-Proof Investments?

As seen above, the very nature of an economic cycle means that a recession is followed by renewed growth, the so-called recovery phase that would, ultimately, lead to a new peak. This could take years to move from one phase to another. Moreover, over the very long term, the economy tends to grow, and the cyclical peaks are higher and higher. A long-term investment vision is therefore essential to navigate through a full economic cycle.

Therefore, it’s important to focus on stocks, sectors and strategies that can withstand the coming recession when the economy begins to slowly decelerate. Because a recession will come, soon or later. Of course, make no mistake, no company will be completely spared from a recession. However, some will suffer much less than others. A few privileged players will even be able to take advantage of the recession.

Five Strategies to Weather The Storm And Survive a Recession

Bet on defense pure players

First, you must focus on recession-proof stocks and sectors. As growth contracts, stocks that depend on the health of the economy become neglected, and defensive ones perform better.

Photo by Nathália Rosa on Unsplash

Broadly, you should go with companies that provide goods and services essential to our daily life. Thus, food and beverages, consumer staples, health, household products or utilities will continue to do business as usual after the initial shock has passed.

Be short (with or without leverage)

When stock markets fall, a few exchange-traded products will allow investors to hedge against risk. Most investors rarely, if ever, consider the concept of short selling in their investment plan and strategic and tactical asset allocation.

Photo by janilson furtado on Unsplash

However, inverse/short ETFs allow traders to benefit from a decline in the value of an underlying index. By using various derivatives, these ETFs have specificities and, above all, the risks. “Beta slippage” effect, counterparty and leveraging are the three main risks to keep in mind when it comes to buying short ETFs. Besides, for the most knowledgeable, short ETFs will allow protecting their portfolio and take advantage of market falls.

Favor moats and healthy businesses

Moats are a wonderful thing. They become even more interesting during tough times, because competitive advantages help better navigate the eddies. This is especially true regarding cost advantage. Indeed, during a recession, consumers will look for lower prices as much as possible, especially for non-essential goods and services.

Then, these companies will be able to undercut their prices without too much concern. They will effectively capture consumers. This is especially true regarding “sin stocks” with low production costs, such as alcohol brewers and tobacco companies, or even low-cost food and staples businesses.

Photo by Grant Beirute on Unsplash

Healthy companies that can pay dividends and secure cash flows should also be kept on your radar. Look on the S&P 500 Dividend Aristocrats, stocks that have increased their dividends for 25 or more consecutive years.

Photo by Chris Briggs on Unsplash

This group of respectable-sized, stable companies with ample liquidity is considered as the “cream of the crop”. Then, return will be mainly related to the dividend, in the absence of a significant increase in stock market prices.

Consider GARP investing

Of course, growth can be a part of your investing strategy. However, you can’t look at growth investing the same way you did when the economy was growing and overheating. Times have changed!

This is why I take you to a subtle mix of growth and value approaches, namely the “growth at a reasonable price” or GARP. Have a look on my dedicated story on Medium:

Foster Dollar Cost Averaging (DCA)

A fractional investment plan makes it possible to invest automatically, regularly and over time in assets. This investment of a defined amount will be made on a regular basis: monthly, quarterly or even weekly. Everything will happen automatically and without any emotional influence, which greatly reduces the risk of bad timing.

Photo by Towfiqu barbhuiya on Unsplash

A very good approach when a recession is ongoing, since it will allow you to spread your entries over time, without worrying about whether the markets will rebound or continue to fall. Very popular when it comes to investing in funds or ETFs, this approach can also be applied to individual stocks.

Another Advice : Build up Precautionary Savings

I would also like to underline the importance of having a buffer, precautionary savings that you can dip into if necessary. Because we must not forget that a recession induces multiple consequences, not only in the stock markets but also in our daily lives.

Photo by Towfiqu barbhuiya on Unsplash

I wouldn’t wish it on anyone, but the odds of losing your job are, for example, increased in the event of a recession. You may also face unforeseen difficulties. In short, having this cash on hand will allow you to avoid having to sell your assets at the worst possible time.

Concluding Remarks

Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.
Peter Lynch

You cannot time the market, let alone recessions. However, you can consider a whole series of parameters (fundamentals, dividends, risks, etc.) to optimize your way of investing, with a view to maximizing returns over the long term. Thus, for a wise and ready investor, a recession will become an opportunity that it would be a shame to ignore and move all your money to cash (precautionary savings set apart).

Let’s be clear: a recession will come and you, as an investor, can already prepare for it. When the next recession finally arrives, savvy investors will know which company, sector or strategy to consider.

Better still, they will have adapted their portfolio accordingly to better survive all along the recession. At worst, they will be better equipped to arbitrate his portfolio while waiting for better days.

It’s up to you to be one of these savvy investors. The best way to protect yourself is knowledge. The more you know, the less likely you are to lose money in the next recession. I hope this article will help you in that end!

I’m Raphaël, founder and editor-in-chief of Investiforum.fr, a financial website for French-speaking private investors. Thanks for reading! Don’t hesitate to follow me on Medium, Twitter or Polywork.

This article is for educational and entertainment purposes only and shouldn’t be considered as financial or legal advice. Not all information will be accurate, but all the data is sourced. Consult a professional before making any significant financial decisions. This article shouldn’t be seen as an incentive to buy or sell any of the securities mentioned therein. I have a beneficial long position in the shares of COST through stock ownership. I have no plans to buy/sell any security mentioned in the article in the three following days.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store