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How to Invest During a Recession For Investors (Best Investment)

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Are you looking for ways to make money for the next recession?

After every economic downturn, stock price of large-cap individual stocks, dividend stocks and defensive stocks with strong balance sheets tend to rebound and come out ahead after every economic recession.

Market volatility is normal, and if you know how to invest during a recession when the prices are low, you can easily outperform mutual fund and index fund ETFs such as the S&P 500.

Now, it is the time to recession-proof your investment portfolio and get yourself prepared for a recession so you can make money during a recession.

What Is A Recession?

A recession is a time when there is a significant decline in economic activity for at least six month that is spread across the economy, public companies start losing money for consecutive quarters. Businesses worldwide are failing, thousands of businesses went bankrupt and millions of jobs are lost.

Most recent recession:

  • The covid-19 crisis has triggered our most recent recession from 2019 to 2021.
  • The great recession was caused by the U.S. housing bubble from 2007 to 2009.

Recession can happen anytime and impact all asset classes.

While a bull market run can last for years and we can face a long period of time without a recession.

But history told us, that whatever goes up must come down, and when we see the warning signs of a market crash, we need to be very wary when investing as a recession maybe just around the corner.

This phenomena of the rise and fall of the economy is called “The Market Cycle”.

How to Make Money During a Recession

There are many ways to profit from a recession, and this is especially true for great investors such as Warren Buffett.

For value investors, a recession is the best time to buy great companies at dirt-cheap prices.

“Recession is the best investing opportunity of a decade.”

But there is a catch.

Before you can make money in a recession, you’ll need the following:

Here, we will look at 5 ways to profit from a recession and get rich during the recession!

1. Stop Renting, Start Owning

With the recession, everything you see will be “On Sale“.

The government or The Federal Reserve Board (the Fed) set the interest rate with the use of the monetary policy.

In a recession, they will lower the interest rate to encourage additional investment spending. A lower interest rate will boost the economy in times of slow economic growth.

Bank interest rates will be made low which means that you can afford a better house with a smaller mortgage payment.

When is a good time to buy a house?

During a recession, this is the best opportunity to purchase your dream home rather than renew your lease.

Many real estate investors who are cash-rich find recession the best time to look for fantastic real estate deals at attractive low prices.

On the other hand, those who over-leverage during the bull run are forced to sell their properties at a discount.

This means tons of great properties are on sale at low prices with low mortgage interest.

A successful investor once told me,

“You don’t profit after you purchase, you profit when you purchase.”

During a recession, the economic relationship between rent versus own will changed dramatically.

If your time horizon of owning real estate extends beyond 20 years or more, it will be a much better choice for you to buy the property instead of renting.

How to profit from Recession - Own Not Rent

Key Takeaway:

Owning real estate will require a high upfront cost and commitment to paying the mortgage.

Although these factors may make renting look more attractive.

But over a long time horizon and at the right price, owning real estate may be a better choice over renting.

Nonetheless, there are risks involved in any form of investing.

Over-leverage is usually the cause of many downfall of an investor, thus should be treated carefully.

2. Bargain Shopping

Sale! Sale! Sale! The great everything ‘Sale’ is here!

If you are doing business or a simple consumer, the recession is the time when many suppliers and shopkeepers are offering steep price markdowns. Everyone is having stuff that is on sale! It is also the time when you can invest with little money.

Consumers

If you are a consumer, congrats you may just be able to buy everything at almost cost price. Not only you are helping the business to survive during these tough times, but as business needs the cash flow to continue operation.

But remember not to overspend or you may not be able to take advantage of the recession to invest in some of the best investment vehicles such as stocks or real estate.

Business Owners

If you are a business owner, this might be a tough time for you, but it is also the best opportunity for you. This is the time you can renegotiate with your suppliers and vendors for a better incoming price of your goods.

In a recession, your suppliers will be much more willing to cut their prices.

During the recession, you can have a mutually beneficial renegotiation with your supplier.

  • Your supplier can help you by lowering their sale prices during a recession.
  • You help them by ensuring they will have a consistent business even during the recession.

But the prerequisite is, that you need to have Cash to survive the recession period, so you may profit from the recession when the economy picks itself up in the future.

You’ll be amazed by how much money you can save from a recession by increasing your margin, thus your profit.

How to profit from Recession - Own Not Rent

Key Takeaway:

A recession is one of the times when many opportunities arrive.

On the surface, it may seem to be bad for business, but when it is made and used correctly, it can be once in a lifetime opportunity where you can really profit from a recession.

3. Stocks Bargain Hunting

When is a good time to invest in stock?

When it is on sale of course!

The best time to invest in stocks and build your stock investment portfolio is when Mr. Market makes everything On Sale!

Who is Mr. Market?

Mr. Market is an allegory first introduced in 1949 by Benjamin Graham, the father of value investing. Benjamin Graham uses Mr. Market to describe the irrational movement of the stock market.

In Benjamin Graham’s book, “The Intelligent Investor”, Mr. Market is a fickle investor whose action is primarily ruled by his emotions.

Without fail, Mr. Market will appear daily and name a price at which he will either buy your interest or sell you his.

Why a recession is a good time to buy stocks?

During a recession, stocks of great companies will be at a bargain price as the general investors will price the company unfavorably due to fear. When the price of the stock is low, you can buy more shares of great businesses at a favorable price.

Mr. Market have a temperament of selling you great stocks at a cheap price during a recession.

Fear is the main reason why Mr. Market (common investors) sells a stock at a loss.

During a recession, fantastic stocks with extremely great balance sheets will be beaten down to a bargain price which happens only once in a decade.

Great companies such as Coca-Cola will drop to a bargain price.

In fact, Warren Buffett brought 23 million shares of Coca-Cola (NYSE: KO) from 1988 to 1989 after the stock market crash in 1987.

Today, Coca-Cola has grown nearly 16 times its value.

Warren got an annualized gain of 11% for the past 3 decades. 

He is also earning a passive income in the form of an annual dividend from Coca-Cola, which generates a 62% yield on a cost basis.

“It is better to buy great companies at good price, than bad companies at great prices.”

Warren Buffett

A recession is uncommon. It has only occurred very few times in history.

When the stock market has a lot of fear, this will be the best time for you to buy great companies at a great price.

History has shown, that recession happens approx. every 10 years.

If you miss this opportunity, you may have to wait for another 10 years to buy one of these great companies.

Build your portfolio when stocks are “On Sale!”

Stocks To Consider

When looking at stocks to buy during a recession, consider stocks which have good strong health balance sheet. Do note that past performance does not indicate the company will perform the same in the future, however, these are some stocks you may want to consider when investing in individual stocks at times of recession:

  • Large-cap stocks that are profitable even during the recession.
  • Bank stocks which are not overly leveraged.
  • Growth stocks such as tech stocks which shows high profitability and is at a fair price.
  • ETFs that tracks the market index.
  • Defensive stocks such as consumer staples stocks.
  • Dividend stocks with reasonable payout ratio.

Amount the different types of stocks, dividend stocks tend to be large-cap stocks, that are also defensive stocks, and these stocks generally are more stable and recession-proof even during the market downturn.

How to profit from Recession - Stock Shopping

Key Takeaway:

Mr. Market was first introduced in the book, ‘The Intelligent Investor‘. Mr. Market is an allegory created by the Father of value investing, Benjamin Graham. Who is also the mentor of Warren Buffett.

Warren Buffett explains the irrationality of Mr. Market through his investing strategies which made him one of the richest men in the world according to Forbes.

“Price is what you pay. Value is what you get.”

Warren Buffet on investing

4. Refinance During The Recession

Mortgage interest rates will usually be at an all-time low during a recession. This means you will need to pay less for your home mortgage. In addition, it will be easier for you to apply for mortgages if you’ve got good credit.

The reason is that, during a recession, the government will promote policies that will encourage banks to lower their interest rates to help stimulate the economy. Lowering the interest rate will give rise to cheap debts, and not all debts are bad.

“When paying for mortgage, a dollar saved, can be a dollar invested.”

You can take advantage of refinancing in 2 different ways.

Home Loan Refinance

Home loan refinance is to refinance your existing loan and replace it with a new one.

There are mainly 3 reasons why homeowners choose to refinance

  1. To obtain a lower interest rate.
  2. To shorten the term of their mortgage.
  3. To convert a mortgage from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.

Refinancing your home loan is a low risk way of benefiting and profiting from a low interest rate environment during a recession.

During a recession, banks will often offer a list of low-interest refinancing packages.

You can actually take advantage of the low-interest rate environment and lock in the fixed rate for a number of years.

Simply by locking down low, long-term, fixed rate mortgages can save you thousands over the years and is an extraordinary opportunity in today’s recessionary environment.

Cash-out refinance

Cash-out refinance is a mortgage refinancing option in your existing mortgage loan is replaced with a new loan amount that is larger than the amount you owned previously.

There are mainly 2 reasons why homeowners choose cash-out refinance

  1. To obtain a lower interest rate.
  2. To withdraw a portion of your home’s equity in a lump sum.

Cash out refinancing is a high risk way of benefiting and profiting from a low interest rate environment during a recession.

Cash-out refinancing is only suitable for professional investors who have a high-risk appetite.

With a low-interest rate, these investors can withdraw the equity from their property for investing in purchasing assets.

Cash-out refinancing is risky because you are getting into more debt.

Although the mortgage loan after refinances may be low on the interest rate.

All debts have to be paid someday.

Leveraging is how the rich gets richer, but it is much riskier and is not for everyone.

Unless your investment return is much higher than the interest rate of your loan, it is not recommended to do so.

Fortunately, there is one thing you can do to reduce the risk.

In order for you to reduce the risk, you can choose to fully amortize your loan payment by refinancing into a fixed-rate loan over the long term.

How to profit from Recession - Refinancing

Key Takeaway:

Leverage is a double edge sword. It can help you to become richer, but it can also ruin you totally.

Over-leveraging is usually bad, Warren Buffett’s thoughts on leverage basically sum it all up:

“I’ve seen more people fail because of liquor and leverage, leverage being borrowed money. You really don’t need leverage in this world much.

5. Take Back Time

Money can’t buy time, but time can buy money.

Strange it may sound, but a recession can actually save you time which helps you to profit from the recession.

Make your free time count

Normally, most people will spend their weekends or rest time laying on the couch with a bag of potato chips and watching Netflix or Disney Plus.

With a whole weekend spend wasting away. This habit actually cost them lots of money. 

The same weekends can be used to learn a new skill where it will help them in their next career move, get a pay raise, or even a promotion.

For those who are ambitious, the time saved may even allow them to create a side business where they may one day leave their 9 to 5 job and be their own boss.

In my other article, I actually talked about a few ways to easily create a passive income with little to no money.

You can also create your own passive income with your current expertise, without learning a new skill.

But in order to create a passive income, you’ll need to change your habit of watching Netflix all day and use that time to create a side hustle.

Improve business acumen

Busyness is the act of just being busy and it robs your time in the form of ineffective meetings, or longer meetings than necessary.

If you are a startup or an entrepreneur, this is the difference between growing your company and struggling in your company. 

During a recession, you’ll need to improve your business acumen.

How to improve your business acumen?
  1. Plan through strategic thinking.
  2. Understanding all areas of your business operations.
  3. Understand how different operation of your business is interconnected.
  4. Identify areas where it makes the most difference to your business.
  5. Apply the 80/20 Rule (Pareto Principle).
  6. Lean your processes.

Making a profit during a recession will require you to lean your process and maximize the results with minimal resources.

Most of the time, young entrepreneurs and inefficient management team spend their time doing things that don’t matter. They make themselves busy doing work that has little or no value.

Being busy by doing things that customer doesn’t care about won’t get you anywhere.

Improving your business acumen by making your process lean can save you time and money.

Learning how to lean your process doesn’t only make the work worthwhile and keeps your efficiency high.

It allows you to have time to create the best strategy to grow your company.

How to profit from Recession - Take Back Time

Key Takeaway:

24 hours is all we are given each day, and this is the only thing that everyone is given equally. How you use your time each day determines where you stand tomorrow.

The difference between success and failure is how you use the time that is given to you.

In my other article, a 61 Years-Old Multi-Millionaire tells us what are some of the worst time wasters you should avoid

Cash Is King During The A Recession, Downturn of The Stock Market

Cash is the most important resource during a recession or depression. Not only cash is required for our living expenses, but cash is also required for us to maximize our profit during the recession.

Investors who are cash rich become wealthy during recession, because they have resources to invest when others don’t.

And this is especially important if you want to profit big from a recession. Without tons of cash, you can still profit from a recession, but when you have lots of it, you become extremely wealthy from a recession.

In our article Steps to Prepare for Market Crash, we have shown you what are the steps you have to do to prepare yourself for the market crash.

If you have done these steps correctly, you will probably be rich in cash during a recession or market crash.

One quick piece of advice about investing.

The market is ruled by the irrational behavior of greed and fear. Therefore you must be wary of the herd mentality.

“Be Fearful When Others are Greedy, Be Greedy When Others are Fearful.”

Warren Buffett

If you want to profit from the recession.

Cash is king.

You want to make sure you are ready when Mr. Market creates an opportunity, where everything is on sale!

We at Income Buddies call it, “The Mega Recession Sale!”

Key Takeaway:

Before anything else, preparation is the key to success.

Alexander Graham Bell

Interesting Facts about Recession

“Recessions is when more Millionaires are made than any period of time!”

In the news, Trillions of dollars were reported “lost” during the last recession, but in reality, it is just being transferred.

A recession is actually the biggest opportunity to grow your wealth and business.

Money itself doesn’t just disappear or evaporate into the thin air, money only gets transferred to someone’s else bank account.

Example: When you buy a coffee from a café for $4.50, you transfer $4.50 to the store owner and made the store owner slightly richer.

Question: “Do you want to be the one paying for the coffee, or the one receiving the money?”

How To Profit From The Next Recession

To profit in the next Recession, you’ll need to be prepared when the recession hits,

  • Learn about proper personal finance and wealth management.
  • Learn how to save money to invest.
  • Find new income streams to build your cash holdings.
  • Identify companies which are recession proof.
  • Learn investment strategy such as dollar-cost averaging.

All these can help you prepare yourself for the next recession, giving you the confidence you’ll need to know what to invest in during a recession when it is time to take advantage of the market volatility.

During a recession, wealth is transferred from those who are prepared to those who are not. 

This is why the rich keep get richer, and the average keep getting poorer after each recession.

Nonetheless, every action or investment comes with risk and care should be taken when performing each task.

“More You Learn, More You Earn.”

Wisdom from Billionaire Warren Buffett:

Read Also:

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Founder & Financial Writer at Income Buddies | Website | Posts by Author

Antony C. is a dividend investor with over 15+ years of investing experience. He’s also the book author of “Start Small, Dream Big“, certified PMP® holder and founder of IncomeBuddies.com (IB). At IB, he share his personal journey and expertise on growing passive income through dividend investing and building online business. Antony has been featured in global news outlet including Yahoo Finance, Nasdaq and Non Fiction Author Association (NFAA).

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