Good Investments in a Recession

March 22, 2013

RecessionAre there truly any good investments in a recession? On the surface, that may even seem like a ridiculous question. After all, recessions are characterized by falling asset values – stocks, real estate and even bonds can fall in price. So why would you want to be in risk type investments at all during a recession?

The answer is timing. At what point in a recession you buy into any given asset class will largely determine whether it will succeed as an investment or not. But one thing is certain: Recessions are typically the best time to buy into nearly any investment.

Cash and Cash Equivalents

If you want to declare one asset class to be a recession must-have it would have to be cash and cash equivalents. This is because, unlike equity type investments, cash and cash equivalents retain their value even during periods of distress. For this reason, cash is the perfect investment vehicle to have, especially during the early stages of a recession.

Any capital that is held in cash and cash equivalents will hold its value, and be available as a recession ends. You can then move in to equity investments when they’re at the bottom of the price cycle. A large cash pile will enable you to buy up bargains in other investment types just as prices are beginning to recover and advance.

If it appears that a recession is on the horizon, getting out of equity type investments and loading up on cash will be one of the most profitable recession strategies possible.

Small Cap Growth Stocks

Since recessions and declining stock markets are closed traveling companions, success in this investment class during a recession will all come down to timing.

If you’re holding too many stocks as a recession sets in you could end up taking a bath early in the cycle. But if you are primarily invested in cash until the late stages of a recession, you can move into the market and buy up small cap growth stocks. Buy at the right time, and you can see some killer gains as both the market and the economy recover.

Small-cap growth stocks tend to do especially well as the economy improves because they are usually a foundational part of the recovery. Small companies bring new ideas and products to the market, and typically set the pace for the recovery. As they do, investment capital flows into their stock, and the gains can be spectacular.

Recessions are usually the very best time to buy in this market class. Just make sure that you don’t do it too soon or you can just as easily ride prices down.

High Dividend Stocks

High dividend stocks offer tangible advantages during recessions. First, since these stocks pay relatively high dividends, they are providing investors with an income flow. As recessions unfold investors often trade growth potential for income. This is not only because income investments provide a more certain return, but also because the growth goes out of growth stocks in recessions. High dividend stocks tend to be more certain.

Second, since they pay dividends, the price levels are better supported than non-dividend paying stocks. This is because investors hold the stocks for their income flow, and not just for the growth potential.

Though dividends and stock values can fall in a recession along with the rest of the market, they typically don’t fall as far precisely because of the dividend yield. For this reason, dividend paying stocks can be a solid investment during most phases of a recession.

Real Estate

Much like growth stocks, timing is everything when it comes to real estate as an investment in a recessionary environment.

If you’re holding real estate during the early stages of a recession, you may see a price decline. This won’t be too much for problem if you are planning on holding your real estate throughout the recession and into the next recovery. Real estate is, after all, a long-term investment of the highest order. You will more likely be looking for significant investment gains over a period of 10 to 20 years, rather than two or three.

If you’re looking to buy – and to maximize the return on your investment – buying at the bottom of a recession can present an incredible opportunity. You will be buying at a time when sellers are having difficulty selling their properties, and many will be more than willing to cut the price in order to make it happen. If you are in a position to buy at the bottom of a recession, this can be a once-in-a-lifetime chance to get the best investment gains possible.

What other asset classes do you think will be good investments in a recession? Leave a comment!

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Kevin

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Kevin
Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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4 Responses to Good Investments in a Recession

  • Kirk Kinder

    Treasury bonds are also a great investment (or have been) during a recession. Money runs to safety, and the US Treasury bonds are seen as the safest asset in turbulent times. This could certainly change due to our debt levels or if the dollar no longer serves as the world’s reserve currency, but if you look at every market pullback over the past few years, Treasuries did well.

    • Kevin Mercadante

      Hi Kirk–That’s a good suggestion. It should come under “Cash and cash equivalents”, and I should have been specific about that. Excellent follow up, thanks!

  • Kevin

    Hi Damian–That’s very well put. Recessions mark the end of some fortunes but the beginning of new ones. Entire industries too.

  • Damian

    I think that recessions are the time where people with a descent amount of money as well as a serious understand of value and worth became rich. Granted, plenty of people probably lost fortunes too!

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