Smart investing during recession can be a life-changing event for many. Investment is a really important part of our life. We invest our time, money, effort, and sweat on a dream. If the plan fails it fails us. Sometimes it is too hard to get back if the investment fails. So, it is really important to understand where we are investing. Since the outbreak of COVID 19 people are panicked all over the world.
The economy is stuck in many countries because of the impacts of the Novel Coronavirus. Logically many can foresee a big recession coming to hit the world economy. So, the investors are worried about their existing investments and many wondering what would be the way of smart investing during a recession in 2020.
Analyzing The Important Events And Factors Of 2020
Before going to the discussion of recession possibilities and the investment scopes, we should check about some of the important events and facts of 2020. These events turned the direction of the world economy completely. Almost all the countries are forced to change their economic development plan.
COVID 19 (Coronavirus) Outbreak
The COVID 19 (Coronavirus), is an ongoing pandemic that is already spread to almost every country in the world. This outbreak was first identified and declared in Wuhan, China, in December 2019. After almost a month, the World Health Organization declared the outbreak as a Public Health Emergency of International Concern on 30 January 2020. Later on it is declared as a pandemic on 11 March 2020. From the time world came to understand the true meaning of global lockdown.
Countries are under lockdown, factories & shops are closed. The world has never experienced such a situation after the globalization efforts of this era. All the way restrictions on movements and activities across the globe. World economy took a different turn and everything seems uncertain now.
Potential Trade War Between USA & China
Following the pandemic, a long-dormant trade war between the USA & China is so visible now. Though the competition was there for long but it is so visible right now. USA is now more desperate than ever to restrict China supplies inside the USA and other friendly nations. In the long run, it is pushing the world economy to an uncertain direction as many countries now withdrawing or planing to withdraw investment from China to avoid the upcoming blow for the Trade war.
This also opens the door for many developing countries for new investments. Countries like Vietnam, Cambodia, Myanmar, Bangladesh, etc are expecting to come up as the replacement investment zone to replace some of the foreign investment in China.
China Dependent Supply Chain Orientation
However, the trade war and the restrictions could not hold back China’s dominance over the pandemic hit the world economy. Despite all the obstacles China’s economy actually boomed. If we go through the report it is clear that some gained by this pandemic situation and some made a huge loss. And it is also visible that most of the benefited persons are from China. Being an early survivor, China took the lead to supply the safety equipments and the necessary products all over the world. As a result, we can see a China dependant supply chain orientation in the progress.
Wave Of Bankruptcy For COVID 19
Following the economic disorientation and the lockdown all over the world the list of bankrupted companies is getting longer. Every day more and more companies are applying for bankruptcy. That is causing a huge void in the economic world.
Huge Number Of Unemployment
Millions of people are losing jobs all around the world. Only in the USA, almost 22 million people lost their job by mid-April. That might get doubled by the end of May. Many developing countries that rely on the orders from the developed countries are struggling more. As the big companies are applying for bankruptcy the poor suppliers foresee possible deprivation from their dues. That might lead to unemployment for millions of low paid workers all around the globe.
Understanding The Recession
To understand smart investing during the recession we must understand the term “Recession” first. Then we will be able to understand the impact on the economy and the strategies to tackle the recession in favor of us. There are many study reports on past recessions and their impacts. We would better skip the theoretical terms and conditions about recession. We will discuss the recession in general terms to understand with less complexity.
Generally, when an economy faces a significant decline and lasts for a certain time (approximately 2 quarters) which is also visible in real GDP, real income, industrial production, and employment. We can call it a recession. In a normal situation, the recession begins when the economy reaches its peak. The recession ends once the economy touches its trough. Most importantly between trough and peak, the economy is in an expansion. Most of the recessions are short-lived.
But the recession can be generated due to unexpected events like the COVID 19 outbreak this year. US economy is anticipating the worst economic fallout since the Great Depression. Since the reports from April suggests the economy is already on the recession. If the next quarter also continues the same way it would be officially a recession caused by the COVID 19.
Now, let’s check what might happen in this recession. Generally the governments cover up the recession by reducing the social and economic expenditures. They try to manage the recession without causing inflation. So, it is important to balance the cash support given to the economy to cover up the recession. The government tries to nourish the economy by cash payments to citizens and small and midsize businesses, interest-free loans, delayed tax payments, and travel and tourism coupons.
So, we can see the economy will be shrinking at the same time helps from the government will be increased. Hence, that is our scope to plan smart investing during the recession.
Understanding Smart Investment
The theoretical definition of Investment is, “Sacrificing something now for the prospect of gaining something later.” Therefore, smart investment can be described as deciding and planning smartly what we would sacrifice for gaining something later. So, the expectations from the smart investment would be as below –
- Lower risk
- Higher Profit
- Quicker Turnover
- Long Term Goal
Smart Investing Options During A Recession
Most importantly considering the events of 2020, we can assume a possible recession is in the making. Moreover, the recession could stay for a much longer period of time. As we can see the pattern of this pandemic is turning out to such a way that it might co-exist for a long period like AIDS. Let’s check out the smart investing options during the recession.
Investment In Shares
First of all investment in the stock exchange is a very popular form of investing option. Shares are considered as a growth investment as they can grow the value of the original investment over time.
And more interestingly because of the pandemic the current situation is ideal for investment if you understand the market. As the present market value for the shares is very very low. And the values might continue going down. So, you must have the proper knowledge to identify the perfect company to invest in. Since the stock market is one of the high-risk investments, you must be really careful while investing in the stock market. Our advice for the smart investing options in the stock exchange during a recession would be as below –
- During a recession people will still spend in the core sectors. So, you should consider investing in the Core Sector Stocks like the healthcare, utilities, and consumer goods sectors.
- You should check and find the dividend-producing stocks. So, you can expect profit in the long term even after the recession is over.
- Research and make a wish list of the sectors that are Poised to Grow. Sectors that have more possibility to boom after the recession you can target those sectors.
- If you consider investing in the share, never put all your money in one basket. Rather invest in a Diverse mix of stocks.
Investments In Properties
Another option for smart investing during the recession could be the investment in properties. There could be many types of properties that you can buy at a cheap price now and can sell when the situation will improve. As the situation improves the price would be increased back to the normal level. If you can choose the right product to invest in, with a long-term plan you can build a fortune for yourself.
Though during recession Real Estate business seems pretty down as people lose the buying power. And with the increasing unemployment rate, it might seem the business in this sector will be a bad choice. But interestingly, there will be more opportunities than ever. The reason is that many people will have to downgrade from their living standards. And they might have to look for a cheaper option for home.
There it offers two opportunities. Firstly, with less money in the market, you can buy upscale real estate with lower prices which can be sold at a high price once the recession is over. Secondly, the selling option for real estate is also there since many people will be moving for cheaper option accommodations.
Precious Metals like gold, platinum, or silver can be another option to look out during the recession. For many reasons investing in precious metal can be worthy. The general trend for these properties is to go up in price during a recession.
These are some investment opportunities that are more focused on consistently generating income, rather than growth. These investments are of lower risk than growth investments. For example, someone can invest in bonds or commodities. As those things don’t depend on the price of the stocks or bonds. Rather, they trade independently from other asset classes.
Generally, cash investments include everyday bank accounts, high-interest savings accounts, and term deposits like the Provident fund or Fixed deposits. This investment type generally provides the lowest potential returns among all the investment types.
Though they offer no chance of capital growth, but they can ensure regular income. Above all, this investment can play an important role in protecting wealth and reducing risk in an investment portfolio.
Fixed Interest Investments
One of the best-known types of fixed interest investments are bonds. Bonds are investments based on a fixed interest rate when governments or companies borrow money from investors and in return pay them a rate of interest.
Many consider the bonds as a defensive investment also. As they generally offer lower potential returns and lower levels of risk than shares or property.
It is possible to sell bonds relatively quickly, like cash. Most importantly, you must know that they are not without the risk of capital losses. But for that, the government has to default on its debt, and that is not a likely scenario for the majority of the economies.
Invest in Yourself
Best investiment is to invest on yourself. If someone is laid off in the recession, you can rebound stronger by investing in yourself. You can start the education again and gain additional knowledge or skill. Eventually, that might help you to take your career to another level.
Another option of self investment is possible if you have possible source of cash flow. As there is always a tendency of higher unemployment during recession, if you feel the risk of losing your job you might think of doing something about your debt or loans. As it will be stressful to pay out the debt money with interests during the economic crisis. In that case, you can pay out your debts and loans as much as possible, so that you have to pay less bills during the recession.
Investing As a Small Business Owner
If you have enough cash flow to start one, this might be the time to be the entrepreneur you always wanted to be. But the choice of your field will define if you will be successful or a failure in this money crisis environment. And it can help considerably if you’re selling a need rather than a luxury. People still have to eat in a diving economy, although they might not need gourmet coffee. Grocers might do well in a recession while Starbucks stumbled. Likewise, sellers of discount products are likely to do well in these times
Best Tips For Smart Investing During Recession
Use The Dollar-Cost Averaging Method Efficiently
While investing in the stock market, you might be aware of the term Dollar Cost Averaging. This is a process of investing the same amount of money in the same item for a long period of time. As you are investing the same amount of money but at different times, so the buying prices are different too. Over a longer period, it reduces the chance of a higher range of loss or profit. By doing that, it ensures the safety of your capital.
As during the recession, the share prices tend to reduce, you will be able to buy many more shares with the same amount of money allocated. Also, to cover up the previous loss or for more benefit, you can use extra investment on this share. But before starting the Dollar Cost Averaging process study the company you are investing in. Because it all depends on selecting the right company.
Don’t Invest All In One Sector
Don’t put all your resources in one basket. Cause any business can fail. It does not even matter how accurate or practical the plan was. Many factors can drive the economic events in many directions. So, your plan might be right considering the situation now but can fail in the future situation. So, you need to mix your portfolio of investment in different sectors. It could be different business types also. Mixing will reduce the risk. If one sector fails, another sector might cover up the loss and you can even still profit
Savings Is The Savior
It is really obvious that a healthy savings account will be much beneficial to you if a long term recession hits the economy. As we can see during the recession the selling pressure in the stock exchange is much higher. The reason behind that is many people lose their job and the majority don’t have enough savings to pass this tough time. So, they become bound to sell the stocks even in the low price to ensure the necessity products.
So consequently, if you have a healthy savings, you can manage the necessity in the recession and might be able to even invest some. Smart decisions of investing during the recession can be very fruitful in the long term. A high-yield online savings account is a great option in terms of earning the most on interest.
Set A Realistic Goal And Plan Of Actions
While you are planning so many things to do during this pandemic hit economy, you must not get carried away. Every business has it’s own risks. So, your investment plan should have a realistic goal. Also, there should be a backup plan. So that, if the plan fails to produce the profit you planned for, you can still save your capital and try again in another way.
If your plan and the goal is not realistic, you might fail to get the desired profit and might become demotivated. In that process, you will not only lose the profit but also the capital. That can be a huge blow during a money crisis situation in a recession-hit economy. So, plan to keep the realistic risk allowances.
Invest For The Long-Term
It is neither ethical nor logical to target the short time profit during the recession. As people will already be struggling to manage the daily necessity. It will not be humane to just think about yourself and stocking necessity products for quick profit. Rather focus on the long term targets.
While investing in the right sector you should be mentally prepared to give it enough time to bring results for you. As recession can be very unpredictable in nature, so your investment could go wrong. but if your selected investment sector is strong, you will be still able to achieve the desired profit over time.
Assess All the Risk Thoroughly Before Jumping In
As we were mentioning several times, business is all about understanding the risks and acting accordingly. Before investing in any sector you must understand the risk factors involved with it. Then you have to plan and decide how much risk you can take. Like all the other economic activities, there is always a positive relationship between the risk factors and the profit margin. You have to check all the details thoroughly and take the calculative risk considering the target.
But if you feel the risk of business is something too much for you. Or you love being the smart employee of your suitable workplace you can work on your self and learn the tips for employees in lockdown. Be the best of whatever you do in your life.
Investing involves risk, including loss of principal. Past performance does not guarantee or indicate future results. This information is being provided for informational purposes only, and is not intended to provide, and should not be relied on, for accounting, legal or tax advice. You should consult your tax or legal adviser regarding such matters.