Investing in stocks during a recession can make people a lot of money, but it comes with risks. You need to know what types of stocks to invest in and what types of stocks to avoid. The best way for long-term investors to invest is to choose strong companies that don’t operate in the industries most affected by the recession. You want to avoid risky, speculative companies when investing. They may seem like they provide the best chance of making huge gains, but you could just as easily lose all your money.
Choose Recession Resistant Companies
There are certain sectors and companies that perform better in a recession than others. These are companies in core sectors such as banking, telecommunications, and utilities. These types of stocks normally have strong balance sheets and are able to weather the recession better than most other companies.
No matter what is happening in the economy, people need to bank and pay for everyday bills like internet, phone, and utilities. The start of a recession when the entire market drops is the best time to pick up recession-resistant stocks. You can get them on sale, and they normally rebound quicker than other companies that do not offer core services that everybody uses.
Avoid Cyclical Stocks
Cyclical stocks are stocks that follow the pattern of an economy. When the economy is booming, cyclical stocks do really well. When there is a recession, these stocks do poorly. People who want to come out of a recession a winner should avoid investing in cyclical stocks.
Stocks in cyclical industries tend to be some of the last to rebound. They rely on people having disposable income to spend on non-essential items, which a lot of people don’t have during or right after a recession. Examples of cyclical stocks include the travel industry and car manufacturers (especially companies that make higher-end cars).
Consider Investing in Companies that Pay Dividends
A dividend is when a company pays out some of its profits to shareholders. Essentially, a company makes way more money than they need to operate and grow their business, and they pay their shareholders a portion of their profits. Dividend-paying companies are a great choice for long-term investors investing in stocks. A lot of companies that pay dividends are recession-resistant, have high earnings and are safe, mature companies.
One of the most important things to consider when choosing a dividend-paying company is the payout ratio. The payout ratio is the percentage of earnings paid to shareholders through dividends. If a company is paying more than 75% of its earnings to shareholders, you may want to reconsider whether or not that payout ratio is sustainable. If you’re interested in long-term investing, you want to make sure the dividend stocks you invest in now have the ability to continue to pay (and hopefully increase) dividends for decades to come.
Avoid Highly Leveraged Stocks
New companies tend to take on a lot of debt in order to grow their business. That’s fine when the economy is booming, but it can be a disaster for companies during a recession. Companies with large amounts of debt on their balance sheet and lower earnings are not the best companies to invest in during a recession. If they were struggling to pay their debts before the recession hit, then they are really struggling to pay their bills during the recession.
They have to figure out how to make the same debt payments they made when the economy was strong when they are bringing in significantly less revenue than before. If they can’t figure out how to increase their revenue, they either have to get a bailout from the government or go bankrupt. As an investor, you don’t want to risk buying a company with a high debt-to-equity ratio. You could make a lot of money after the recession, but you could just as easily lose it all.
Diversification is Key
The saying “don’t put all your eggs in one basket” is a cliché for a reason. One of the best things you can do when investing is investing in a number of different companies in a variety of different sectors. If you have $10,000 to invest, don’t put it all in one company.
Spread your investments out among 3 to 5 companies in 2 or 3 different sectors. You’ll build a portfolio that will not only do well during the current recession but is built to do well during future recessions as well. You never know what industry is going to be hit the hardest during the next financial crisis, so you need to diversify your assets and make decisions that will protect you in the future.
Avoid Speculative Stock
There is no shortage of stocks that people tell you are the next hot stock that will make you rich within months. Most of them turn out to be terrible investments, and you end up losing all your money. Speculative stocks that haven’t been proven are risky at the best of times but are an even bigger risk during a recession.
A recession is a time to buy good quality, long-term companies that have proven themselves. It is not the time to invest in the next hot stock that nobody has heard of.
A recession is one of the best times to invest. The entire stock market goes on sale, and you can pick up the best stocks at a discount. Making smart decisions and buying recession-resistant dividend-paying stocks will make you rich in the long run. Investing during a recession is not the time to take risks. The chance of losing all your money if a company goes bankrupt is not worth the potential gains if it doesn’t.