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I previously stated that it is unwise to stop investing before a recession. I never mentioned how to invest before a recession. The reason I did not is because I was not sure what the answer was. While I am writing this blog to teach people personal finance and set up a platform for a business. I am also writing this blog to learn more about finance. I have learned so much from the process that now I feel confident enough to talk about how to invest before a recession.
Avoid Index Funds
If all of your investments are in an index fund, now is the time to start diversifying your assets. Avoid investing any further into index funds which match the market. It makes no sense to invest in an index fund with a possible recession coming. I’m sorry it just does not.
For actively managed funds the rule stays the same, especially if they try to match an index. The only advantage would be if the fund has bonds in it like a balanced fund. But even then the assets are in enough equities for there to be a great risk of loss in investments with a downfall. A balanced fund would barely be an improvement.
I am not saying to pull your investments from these funds, but instead start finding new areas to invest. If there will be a correction in the market then there will likely be a decrease in value of these funds. But do note, there is no guarantee of a recession and even if one does happen the fund will likely bounce back.
Individual stocks are normally riskier than any type of fund, but that may not be the case just before a recession. Some markets are overvalued just before a recession, but some companies may be undervalued and may be resistant to the drop in the market. Some of these stocks may go down in price during a recession. But that may be more from sales of funds than individual stocks. If a stock is undervalued, investors are less likely to sell them individually.
There is a difference between an undervalued company and a perfectly valued/overvalued failing company though. For individual stocks you should research the companies to find out what they sell. You should look for companies that sell products or services in which are in constant demand. These are defensive stocks. I will bring them up in a future post. Try to find undervalued defensive stocks. They will likely beat market indexes and the funds that try to mimic them.
Despite what happened during the recession of 2008, real estate bubbles rarely happen during other market bubbles. 2008 was the exception, not the rule. It is apparently unlikely that the next market recession will be accompanied by a real estate recession and vice versa.
You must be careful though. There are only so many places where real estate investing is considered stellar and tax codes can change the value of your investment with the snap of a politician’s fingers.
Real Estate Can Still Be Speculative
Not all real estate is equal though. While everyone needs real estate, no one ever needs your real estate. Anything could change the price of real estate. There are many things that could make your house worthless. Furthermore, during a recession it may be hard to have any cash flow with your property and it will be harder to sell. That may mean that real estate may not be the best thing to invest in the traditional way where you put down tens of thousands or hundreds of thousands aside in real estate.
There are other ways to invest a smaller amount of money and those methods may be more favorable before a recession. In fact, I am planning for my next large investment to be in at least one REIT. Read my previous post about REITS and other ways to invest in real estate with less money.
One of the most common investments financial advisers recommend to invest in before a recession are bonds. While bonds are considered to be safer investments, they are never guaranteed to rise in value. While bonds are good investments, I only see bonds as something you should invest in with other investments such as stocks, like in a balanced fund. Bonds should act like buffers, not as sole investments.
You should invest more in bonds, but not without investing in higher volatility investments as well. The only time I would ever recommend switching to bonds is if you can time the market perfectly. (If you have these powers, please tell me about them so I too can be a multi-trillionaire, extreme sarcasm notice). I would never recommend investing in any fund with more than 80% of the investment in bonds, but otherwise, balancing the ratio of bonds to stocks are good ways to invest before a recession.
One of the most common pieces of advice I have heard financial advisers give is that paying off debt is the only way to invest in which you will have guaranteed returns. This makes sense because paying off debts will raise your net worth and by lowering your debt, there will be less of your income that will have to be used. I still would not call this an investment and I would still say it is best to avoid debt. However, considering that US consumer debt is $14 trillion, I will assume that most people have some debt. If you do, paying it off during a recession would be one of the best courses of action to raise your net worth.
But if paying off debt is one of the best things to do before a recession, why don’t people do it? Because it is boring. You may justify investing over paying debt because, on average, investing into stocks will give you more of a return. But paying off debt prevents gains in interest to the debt, while the returns of stocks are never guaranteed.
With talk of a recession on the horizon, it would sound like the worst time to put efforts into trying to start a business. That depends, if you expect your business to provide passive income, little effort/investment, and maybe even allow you to quit your job, this would be the worst time. But if you see your business as an enterprise in which you want to put effort in to try to develop income, truth is there may never be a better time. This is one of the best ways to invest before a recession.
When a recession hits, many businesses take hits and have to develop fewer goods or even close down. This will produce a supply vacuum that you can take advantage of. If there is demand for a product, but fewer products, you can take advantage of the demand and develop income quicker than you could without a supply vacuum. THIS WILL ONLY WORK IF YOU PUT IN THE EFFORT. Even if you have no money, your business can do well if you focus your efforts.
How I Invested In My Business
Take my site, Forge Your Wealth. I made it now for many reasons.
1) I am interested in learning more about the world of finance so I know where to put my money.
2) My wife and I have paid off our federal student loan so we have more free money.
3) I enjoy writing.
4) Most newspapers, even online newspapers are closing. Even The Washington Post, one of the most successful newspapers was purchased by Jeff Bezos, and even he is questioning how well it can survive. Bloggers and vloggers are taking place in the media where journalists traditionally were.
5) There may be an app bubble about to pop. Not unlike the dot.com bubble of 2000, some experts believe that companies responsible for products in which have content like mine may close down. However, I do not have any debt in Forge Your Wealth and it can be sustained, so I trust as long as I keep putting in effort it can not only survive the next recession, but even thrive in it. After all, my most popular content tend to be my recession posts.
I know this sounds a little like I am hopeful for the worst to happen, but I do not see this as any different from trying to buy investments on sale. Most investors will not be happy about their loss in worth, but if the investment is sound, there will be future returns. You yourself could try to fill the supply vacuum with the products/services your business could provide and this could be the best way to invest before a recession.
Over Rated Investments
Many advisers will give other pieces of investment advice, some of which I do not agree with. These are not the best ways to invest before a recession.
First, I am assuming that you have the recommended 3-6 months of expenses in savings. If you are reading this post to learn about investing during a recession before you have adequate savings, you are learning a little out of order. I have written previous posts that can show you how and why to save. Second, saving even more is not the best course of action, in fact it could be detrimental. I will bring this up in a future post.
Really? Really? This is on all content that talks about investing before a recession. I have to say this to every personal finance blogger/vlogger or anyone else who makes content like mine. Do you believe that in the realm of the internet where everyone has to try to prevent clicking on content with a top 10 list about celebrities, cat/dog videos, and/or porn (yes, and/or, the internet can be messed up) that anyone reading or watching your content is NOT interested in investing in themselves? Of course, our audience is interested in investing in themselves, they would do something else if they were not. That being said there are good ways to invest in yourself and bad ways, just like any other investment. I will bring this up in a future post.
When news of an impending recession starts to spread, people panic to try to find where they can keep their money safe. There is no guarantee of a recession, and you have more control of the recession than you believe. But when some markets are volatile and questionable, other markets are less questionable. You must find which investments can survive and even thrive during the recession. This is difficult though. You must understand your risk tolerance in order for this to be used to forge your wealth.