1. Stock up on Stocks
Specifically speaking, you should keep an eye on the stocks of companies that produce or sell essentials, like those of big retail chains, food manufacturers and supermarkets. These stocks are usually less affected by recessions as their products are constantly in demand, which means that the value of their stocks is less likely to fluctuate despite the decline of economies.
You should also invest in the stocks of companies with low debt-to-equity (DE) ratios, especially if these have lower prices during recessions. A low DE ratio generally means that a company has fewer debts to worry about, and will thus be able to channel more money to its stockholders after quickly paying off its debts once the recession is over.
The benchmark here would be a DE ratio of 2 — and the stocks of a company with a higher ratio should be avoided because such a ratio implies that the company has a higher likelihood of going bankrupt during a recession.
2. Realise your Real Estate dreamsWhen the economy seems to be hitting all-time lows, should you be thinking about investing in property and real estate?
The answer, in short, is “YES!”. Recessions commonly cause the prices of property to drop quickly and considerably steeply, as consumers like us often shift our attention to saving money and tackling high costs of living instead of seeking out real estate, hence causing the supply of property to exceed demand.
The key here, however, is to remember that this dip is usually short-lived. Previous recessions have shown that the property market is one of the first ones to bounce back from an economic downturn — which means that if you purchase a piece of real estate during the initial onset of a recession, you will probably be able to sell that same property for a decent amount of profit soon after the economy recovers.
3. Bond with some bonds
No, this isn’t a green light to go to spy school and become James Bond, so don’t let those fantasies get out of control just yet.
A bond is an investment tool that is issued by a financial institution when it wants to raise money over a specific time. Once this period ends, the bond matures — and the issuer has to return the purchase price of the bond to those who purchased it with an added interest payment.
Bonds are known for their stability despite economic changes, as long as you buy a bond from a reliable institution or bank. A fun fact? You may be spoilt for choice during a recession when it comes to bonds because more institutions will offer them to raise emergency funding if needed.
Here’s a little tip: Invest in a combination of both bonds and stocks (see Entry #1 of this list)! This gives your investments added security by spreading them out across various stable tools.
You could also consider investing in bonds with longer maturity periods if you believe that the recession is a short one. For example, if your research tells you that the recession will only last for about 6 months, investing in a bond with a maturity period of 3 years will give you at least 2 years of confidence that the issuer will eventually be able to return your initial investment to you with an interest payment.
4. Get cosy with small and new businesses
Image source: The Balance
It is often said that struggles create champions and that they often push us to be more creative and innovative as we fight to survive and thrive.
Economic struggles are not an exception to this notion, as they force businesses and organisations to evolve in an attempt to grow and survive recessions. This is why you should pay attention to businesses, especially smaller ones with unique offerings, during recessions. Investing in these companies during economic downturns can be a highly profitable move, particularly if they survive and begin to blossom once the economy improves.
For illustration, consider the case of Netflix, the streaming platform on which some of you are probably binge-watching shows at this very moment. Did you know that in 2009, Netflix survived a period of great recession by offering consumers a unique and affordable service that was seen as a favourable alternative to traditional entertainment channels?
5. Steel up with precious metals
This entry is useful both during and before a recession, and more so if you are a highly risk-averse investor — that is, not very fond of investments with a high risk of making losses.
Investing in precious metals like gold can be a very beneficial move, including during times of recession. This is because the prices of such metals generally enjoy positive growth rates over time, even during economic downturns, making them a safe investment vehicle.
Evidence of this can be seen in Malaysia’s very own gold market. From 2008 to 2018, the Malaysian gold market saw its prices fall significantly on only one occasion, in the middle of 2013. Aside from this incident, the price of gold has grown over the years — which is why some local banks consider it a good investment to protect your finances against inflations or recessions.
Preparing for a recession
Regardless of which of the tools above you choose to invest in, one thing is certain: you can only invest profitably through a recession with thorough prior research and preparation.
If you anticipate that a recession is coming, just like what economists are saying currently due to the effects of COVID-19 on the Malaysian economy, start putting some money aside and saving up so that you can still give your finances the chance to grow if and when a recession does indeed come along.
This will allow you to potentially offset or cancel out any losses that you might make during the recession. Plus, if you decide to change your mind and not invest that money at all, it would be comforting to have extra savings and more financial knowledge at your disposal anyway!