Best investments to make during a recession

If the economy slows, a recession may not be necessary. The Federal Reserve has promised a recession because of the boom that has led to surging inflation. What is the best way to invest when the economy goes into a recession?

It's possible that the best investments during a recession aren't what you think. When the best course of action is to become more aggressive, many investors make the mistake of becoming more conservative.

After stocks fall, investors pay a lower price for the future growth of businesses. It's the classic "buy low, sell high" that everyone knows but few can practice because of fear.

According to M. Tyler Ozanne, president at Ozanne Financial, once we know we are in an economic recession, the equity investment markets are likely to be closer to the bottom than they are to the top in valuations.

He says it's too late to flee to safety once we know we are in a recession.

A recession is a good time to prepare for a rebound in markets. A recession is more than a downturn in the market, it is also a slowing economy that could throw you out of work. What do you do to balance these possibilities?

During a recession, there are four investments to consider and three that are likely to be avoided.

4 investments to consider if a recession happens

The first thing investors do when markets fall is to bail out. The market is increasing the returns for investors who buy in when it discounts stocks. Your potential future returns are even bigger because of a decline in asset prices, because great companies are well positioned to continue to thrive in 10 and 20 years.

When prices are usually lower, a recession is the best time to get higher returns. If the economy were to go into a recession, the investments below have the potential for higher returns.

Stock funds

Stock funds are a great way to invest during a recession. A fund tends to be less volatile than a portfolio of a few stocks, and investors are less interested in any single stock than they are in the economy. If you can stomach the short-term volatility, a stock fund can give you long-term returns.

A well-diversified fund is a good option for investors who don't want the hassle of investing in individual stocks. The Standard & Poor's 500 is a well-balanced index that includes hundreds of America's best companies and has returned about 10% over time. You own a piece of the market instead of trying to pick winners.

The market has always come back from downturns, says Brooke V. May, the managing partner at Evans May Wealth.

If you want your portfolio to be less volatile, you might want to add some dividends. Your portfolio will bounce around less if you own a high-quality dividend stock. While you wait for the market to turn, they can give you a cash dividend.

Are you not experienced enough to pick your own dividends? It's a good idea to buy a stock fund with a solid yield and reduced risk. If you buy while stock prices are low, you will get a higher total yield.

Real estate

During a recession, real estate can be an attractive investment. It is possible to buy at a cheaper price during a strong economy. The value of your real estate may go up when the economy improves.

It's possible to get a better mortgage rate during a recession when rates are likely to be much lower. Even if rates rise later, you still have a below-market mortgage rate because you can lock in an attractive mortgage payment for a long time.

Many investors have done this in the last few years. Real estate is an attractive inflation hedge due to the fact that they are paying back the mortgage with less money.

High-yield savings account

Are you talking about cash? Cash can be a good investment in the short term. You have a lot of choices with cash. If you lose your job during a recession, you can spend it if you need to, and it will allow you to make an investment in the stock market if it goes down.

There is a downside to holding a lot of money. If inflation eats away at your money, you won't earn enough interest to overcome it. Keep your cash in a high yield online savings account for strategic purposes.

3 investments to avoid if the market is stung by a recession

It is important to make the right investment decision if there is a recession. Prices will probably decline before it is clear that the economy is in a recession. Investments that feel safe may not be attractive picks going forward.

Bonds

It is important to remember that there are good times and bad times to buy bonds, and those times are centered around when interest rates are low. Bond prices go up when interest rates go down, and go down when interest rates go up. Long-term bonds will feel the effects of interest rate changes more than short-term bonds.

When investors anticipate a recession, they may flee to bonds. They expect the Federal Reserve to keep bond prices up. If rates haven't fallen yet, it's an attractive time to buy bonds.

One of the worst times to buy bonds is when interest rates are going to go up. It happens in a recession and afterwards. As the economy returns to growth, prevailing interest rates will rise and bond prices will fall.

May says that companies with high debt loads should be avoided.

Highly indebted companies' stock prices tend to fall before and during recessions. The stock price should be marked down to reflect the risk of debt on the company's balance sheet. If the company's sales decline, which is typical during a recession, it may not be able to pay the interest on its debt.

It can be very difficult for companies to survive a recession. If the company can survive, it may offer an attractive return. The stock can rise quickly if the market pricing the company for death is correct. It is possible that the company does not survive.

High-risk assets such as options

Options are not suitable for a recession. A stock price will finish above or below an options price. The uncertainty surrounding a recession makes them even riskier.

Predicting and guessing what will happen to a stock price in the future with options is only one part of the equation. You could be forced to put up more money than you have if you are wrong.

Keep your emotions in check

Experts point to the importance of keeping your emotions in check during times of economic downturns. Even the best financial plan can be derailed if you make decisions from an emotional place.

• Stick with your long-term plan. “Have a long-term investment strategy or plan and stick with it no matter what the economy is doing,” says Ozanne. He points to the value of having a diversified portfolio, which can help investors weather the market’s turmoil.
• Have an emergency fund. An emergency fund can be especially helpful during the economic uncertainty of a recession. Not only can it help tide you over, but it can also help you stay invested, giving your investments time to rise again. You don’t want to have to touch your investments in the middle of a recession just to pay your bills.
• Stop watching the market. “If the volatility leaves you up at night, avoid watching values on a daily basis,” says May.
• There are more good years than bad. “Historically, there are way more positive years in the investment markets than there are negative years,” says Ozanne. “In a recession, and corresponding negative market environment, it is good to remember that better investment days are probably ahead.”
• Seek out a smart advisor. “Having an unbiased party speak reason, logic, and strategy in an emotionally charged period of time can save investors from making mistakes that could dramatically affect the long-term impact on their investment outcomes,” says Ozanne.

Here is how to choose an advisor who will do right by you.

Bottom line

Investing during a recession can be difficult because the market can be volatile, and you will likely lose money. You may hurt your long-term returns in the process. It is important to stay focused on your long-term plan once the market returns to normal. If you want your decision-making to work for you, try to keep your emotions out of it.