As tough as they may be, recessions are inevitable, and we must prepare for downturns in the market. Luckily, there are strategies that will help you find the best return on investment opportunities, even during a bear market or downturn.
As an investor, you want to know that you’ll see a good return on your investment. But investing your money when the market is down may seem too risky. The last thing you want to do is gamble your money away.
Some investors believe that a recession provides a prime investment opportunity because of the discounted prices a recession comes with.
When purchasing an investment at a discounted price you stand a chance of increasing your return on investment, making it very profitable if done correctly.
However, you’ll have to be comfortable with the risk that you’re taking and be patient with your investment.
Advantages of Investing During a Recession
1. Discounted prices
Due to the struggling economy, investment opportunities are likely to become more affordable.
For example, instead of paying R100 for an Apple stock, you’ll pay R80 instead.
What makes this investment so good is that the value of the investment never decreased.
That means you’re getting the same thing, for cheaper.
It is important to note that you probably won’t be making a return on your investment any time soon. But, if done correctly, your investment will be well worth it over time.
If you do your research correctly and invest in a strong company or property, you will see a great return on investment when the market is strong again.
2. Some investments thrive
There are no “bullet-proof” investments out there, but some investments may perform better than others during a recession.
- Technology Stocks
The tech sector includes business that sells good and services in electronics, software, computers, artificial intelligence etc.
This sector has performed extremely well compared to other markets during the 2020 pandemic.
According to Investopedia, we’ve seen a 36.8% increase in this sector over the past 12 months (recorded in July 2020), compared to the S&P 500 that saw a return of 9.8%.
You may have seen a good return on investment if you invested in some of the tech giants during the first half of 2020.
This also correlates with our behaviour during the pandemic. Being stuck in lockdown has drawn us closer to technology. Technology has played a major role in survival in 2020.
We’ve also seen the property market opening up some new investment opportunities as people struggle to pay their mortgages.
If you want the best return on investment during a downturn, invest in what people need or find unexpected opportunities during a recession.
- Property Market
The property market saw a decline during the Covid-19 pandemic in 2020, which offers an opportunity to some investors.
Research has shown that if the economy shrinks by 6% during 2020, the average house price will decrease by 8.8%. And if the economy shrinks by 10%, house prices could lose 14.5% of their current value.
However, FNB predicts that we might see a decline of 5%, which will still have a significant impact on the price of an investment.
Which means instead of paying R1 million for a property, now you’ll be paying R950 000. Which is still a good investment opportunity.
Investment strategy during a recession
Following a good strategy will help increase your return on investment.
Here are our tips to help you invest during a recession.
1. Don’t sell all your investments
It can be nerve-wracking when a recession hits and you see your investment lose its value. While you may be tempted to sell your investments, it is rarely a good idea to sell during a downturn.
It’s natural to see ups and downs in your investments, so get used to it and be comfortable with it.
You may be overstressed because you don’t know how you’ll be able to afford your monthly bills or debt repayments.
If you had more cash available you wouldn’t be as stressed out about fluctuating market conditions.
A good rule of thumb is to only sell your investments if you need the cash or if that particular investment is deemed to fail.
2. Re-evaluate your investment
When a recession occurs it’s important to look back on why you invested in a particular investment.
Re-evaluate all these investments and determine whether they are still good investments in the long run.
For example, Apple stock may have fallen quite rapidly during 2020. But the company will bounce back when iPhone demand increases again. Just because Apple stock prices decreased does not mean the value of the company decreased as well.
So it’s not worth selling your Apple stock during the 2020 downturn when the company will recover in the future.
3. Increase your cash flow
Having enough cash available provides you with the most peace of mind during a downturn.
If you have enough cash available, you’ll have the security you’ll need when the economy is down. It also provides you with the freedom to invest in case you see an opportunity arise.
However, having cash available for too long will lose value over time due to inflation. You could keep your cash in an interest-bearing savings or money market account but be sure to regularly check the current interest rates on those accounts.
You don’t want these accounts to hit an interest rate of a near zero. If the return on interest on this account is too low, you’ll start losing money.
Take a calculated risk
Investing during a recession can offer some great investment opportunities, but it is important to do your research thoroughly.
If you don’t know what you’re getting yourself into, you’re just throwing money in the wind and hoping it works out.
That’s not investing, that’s gambling.
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