With talk of a recession never far from the front pages, many people put their investments on hold. However, recessions can be an excellent time to get a good return on your investment. Of course, you must be careful about what you do with your money.
This article aims to inform you about three things you should avoid when making investments during a recession.
3 Things to Avoid For Investments Made During a Recession
According to the NBER (National Bureau of Economic Research), a recession is when the economy declines for two consecutive quarters. A recession results in GDP (Gross Domestic Product) shrinking, sales falling, and production slowing down.
Therefore, you should be careful how you invest your hard-earned money. Here are three things to avoid when investing during a recession.
Don’t Prioritise Investments Before Savings
We’ve already stated that recessions can provide great opportunities to invest. However, a recession is a time of uncertainty, so you should also concentrate on creating a financial safety net until the economy and your personal financial situation start to stabilise once again.
Ideally, you should have an emergency savings pot of around three to six months’ worth of living expenses. You should postpone any investments until you have achieved this amount of savings. After that, any disposable income you have can be split between investments and savings. Financial planning can be complex. It is always recommended that you use the services of a regulated advisor like Portafina when making financial decisions.
Don’t Invest Money You’ll Need In the Short Term
A recession will likely push them further down even if you believe you’ve bought shares at their lowest price. Investing in the stock market is best done over the long term. Therefore, you should not expect to access your money quickly after making an investment.
Get into the mindset that your money will be locked away for some time. Doing so will allow you to deal with the short-term volatility of recessions.
Avoid High-Risk Investments
Certain investments are high risk at the best of times. During recessions, such investments can become even more of a gamble. The economic uncertainty surrounding recessions means no company avoids the risk of going bankrupt. However, established companies may be better positioned to ride the storms of recession than newer ones. Therefore, they tend to be a lower-risk investment.
Also, cyclical stocks linked to consumer spending should be avoided in a recession. That’s because these products are the first things people tend to cut back on during a downturn. For example, companies linked to holidays, luxury goods, furniture retailers, and other non-essential items.
Of course, we are not saying that new companies or those dealing in expensive items will go out of business. They could just as quickly succeed during a recession but tend to be a more risky investment.
Conversely, certain stocks tend to perform well regardless of the economic situation. Such stocks are linked to everyday essentials such as food, fuel, energy, and pharmaceutical companies. These are definitely less risky investments during a recession.
Another thing to avoid during a recession is high-leveraged companies. These firms have substantial debts and will still be required to pay interest during a recession. An economic downturn could be enough to put them into bankruptcy. Therefore, check the leverage level of any company you consider investing in.
Although recessions can provide good investment opportunities, there are also plenty of risks during these times. You should not let an economic downturn ruin your investment plans. However, you should now understand the three key things to avoid when investing during a recession.
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