Knowing how to invest during a recession is essential if you don’t want to be relying on your kids to pay for your groceries after you retire. Do you really want your son trying to cook anything more complicated than Macaroni and Cheese? Yeah, I didn’t think so.
Many people feel its time to cash in their stocks as soon as the market hits hard times. This is not necessary. Instead, you should make some adjustments in your long term investment strategy. As is often the case, being diversified is essential to limiting your risk during turbulent economic times.
Most people want to take steps to protect their money during a recession. People take fewer risks, and are unwilling to take a chance at loosing any money, even if it means getting lower returns.
There are several ways to invest your money which you should consider during a recession. Investing in bond funds is one of these options. Many brokers and professionals will recommended that people put their money into investment grade corporate bonds – these are much better than U.S. Treasuries, gold, or fixed income securities. Even after a surprise half-point interest rate cut, corporate bonds remain a good alternative for investors who are trying to avoid the risks associated with stocks.
The average yield on a five to ten year corporate bond is almost always above the ten year U.S. Treasury bond rate, with not a lot more risk. Returns are even greater on a twenty year investment grade corporate bond. Higher yields do reflect the higher risk associated with corporate debt compared to U.S. Treasuries bond debt, but this risk is often not much higher, especially if you are investing in a bond mutual fund.
The percentage of corporations defaulting on debt obligations has been on the rise, but investment risk is still low for high grade investment quality bonds. The default rate for high quality bonds is less then one percent. If you hold an investment grade bond fund, your risk from defaults is quite low. If you buy individual bonds, your risk is much higher.
Junk bonds are another way to invest during a recession. Bolder investors may want to consider these. Junk bonds are named so because they represent debt from high risk companies. Junk bond investors have historically earned their best returns the year after the junk bond market bottomed out. In 1991, when the nation was knee deep in the last recession, the junk bond market produced a 34.6% return on investment.
Interest rates always come down during a recession – bonds benefit from lower interest rates. The declining interest rate is magnified on the junk market because high-yield bonds carry much higher rates than other kinds of bonds. The declining interest rates make the high yields more attractive, which raises the price of the bonds.
The Stock Market
For those who prefer the stock market, exchange traded funds are often a good investment. These can be mutual funds that own stocks which track the performance of a major market index (such as the S&P500), or are actively managed funds. These funds often are involved in early rallies in the stock market, without being exposed to the poor earnings of a single company. ETFs have grown in popularity because they are cheap and easy to trade.
One of the safer investments you can make during a recession is money markets. These are relatively safe, but offer little in return, especially with interest rates being very low. These are great investments if you are not concerned with making money during the recession, but simply want to protect your principle balance and not loose anything.