You may feel that you can’t afford to invest in the stock market or that you don’t understand enough about how the stock market works to “throw away” money on it. While understandable, that doesn’t mean that you can’t learn more about the market and how to time your investments. For instance, recessions are a great time to start investing.
Making the Most of a Recession
While there is plenty to worry about during a recession, one of the great things about an economic downturn is that it can create a prime opportunity to buy up stocks that may normally be out of your price range. Investors who have been in the game for a while often dump stocks to avoid losing money. This is a prime time to swoop in and take advantage of their loss and turn it into your gain.
When buying stocks during a recession, there is one vital fact to keep in mind: You are not likely to buy stocks at their lowest value. That means you should brace yourself to watch your investment initially lose money. This is actually a good thing, as watching your investment drop will prepare you for how the stock market operates no matter whether there is a recession. Not to worry, chances are good that once the downturn is over, your investment will gain value. Patience is the name of the game. That, and making investments for the long haul rather than to make a quick buck.
Deciding Which Investments to Make
Professional investors like Matt Ocko will caution you to make smart investments rather than choose your stocks on price alone. During a recession, some investments are a better bet than others. For instance, utility stocks make for a solid option, mainly because they are made up of companies that experience slow growth but offer generous dividends over time. Something else to bear in mind is that utility stocks are often less vulnerable to interest rate risk.
Consumer staples like toilet paper, paper towels, and coffee are another viable recession investment. No matter what the economy looks like, people always need such items as toothpaste, diapers, soap, and the like. On a related note, healthcare is another safe investment bet. Just like consumer staples, economic downturns usually do not have a major impact on healthcare, mainly because healthcare needs do not dwindle during a downturn. Specifically, look into investing in medical devices.
While you may not be able to afford a house right now, that does not necessarily mean that you cannot afford real estate stocks. Do some research to see which stocks line up with your investment strategy and price range.
Small-cap stocks make for a good recession investment option for those who do not have a lot of money to put toward the stock market. Believe it or not, but small-cap stocks have a history of performing better than large-cap stocks. That is, as long as you hold on to them for the long haul rather than try to use them as a way to make a quick buck. With this specific stock market investment, you may want to focus globally rather than nationally. The main reason for this is that international markets are not always on the same timeline as the U.S. stock market. Diversification is key to making the most of the market, no matter the country or the economy’s current health.
Formulating Your Next Moves
After getting your feet wet in the stock market, what should you do next? It’s worth mentioning the importance of patience again. The stock market goes through its fair share of ups and downs over the years. Focus more on making smart investments and less on riding a trend or quickly buying and selling stocks. When your investments pay out dividends, your best bet is to reinvest them rather than cash them out. Think of dividends as the interest you earn on a savings account. Just as you would make the most of compounded interest to grow your savings account, the same principle applies to dividends.
Stock market apps are more readily available than ever and easier to use, no matter how much or how little you can spare to spend. Look into your different app options, specifically focusing on fees, tools, ease of use, and investment options. In addition to individual stocks, look into exchange-traded funds, as well. EFTs make it easy for you to diversify your investments. Even better, ETFs are affordable.
Fear, anxiety, and panic can run rampant during a recession. Rather than allow the hysteria to drag you down, look for opportunities wherever you can. Using this time to invest in the stock market could be the key to securing your financial health and peace of mind when the time comes to cash out your investment in the years and decades ahead.