Are we entering a recession now?

The short answer is likely yes.

When a country’s GDP (Gross Domestic Product) has been declining for two consecutive quarters, we say that the economy is going through a recession. When a recession happens, there are generally less consumer demand, jobs and economic output. 

According to The U.S. Bureau of Economic Analysis, we have already seen a decline of the US GDP for both 2022 Q1 (-1.6%) and Q2 (-0.6%) with a rebound for Q3 (2.6%): 

Will this GDP continue to decline in the next few quarters? There are no definite answers, but with the Fed continuing to raise interest rates and fight the stubbornly high inflation, likely so. 

According to The Wall Street Journal’s survey with economists, more than 60% of the participating economists predict that the US is entering a recession in the coming 12 months. 

So are the rest of the world. Based on a recent survey by the Conference Board, around 68% of the CEOs predict that they are entering “a deep EU recession, with material global spillover”. 

So the ugly truth is that we probably need to brace for the upcoming recession. But a recession does not have to be that scary if you are prepared. 

One thing you can start doing is to reduce spending and save more money. So when the market opportunities come, you will have the financial confidence and capital to invest.

Investing during a recession 101

Of course, the best investment strategies during a recession depend on your stage of life, financial status and other personal factors – they need to work best for you. But here are some good rules of thumb for “recession-proof” investment strategies: 

• Have a long-term investment strategy

Although markets might go through some turbulence in the next year, they normally keep rising in the long run (we are talking about 10, 15 years or more). In the case of investing in an S&P 500 index fund, even if you invested at the peak of the market in 2007 before the financial crisis hit, you would still have made more than 150% return as of Oct 28, 2022 in the span of 15 years. 

• Adopt a dollar-cost averaging strategy

Dollar-cost averaging strategy refers to investing a fixed amount periodically regardless of the share price and market performance. 

Since the investing guru Peter Lynch once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves”. 

We will never know when exactly the bottom of the market will hit. But if you regularly put a fixed amount of money into index funds (or other undervalued stocks) and hold your portfolio for a long time, through the good and bad times, you will generally make a positive return. 

• Invest in high-dividend stocks and fixed-income bonds

With high-dividend stocks, investors still receive dividend income even though stock prices go down. Therefore, many investors turn to dividend stocks during a recession for extra cash flow.

In addition, investment-grade bonds tend to do well during recessions. That’s another option investors can look into.

Here are some dividend stock and fixed-income bond examples and resources that can help during a recession.

• Invest in recession-resilient sectors

According to Delia Fernandez from Fernandez Financial Advisory, the health care and consumer staples sectors tend to be more resilient during recessions. Investors can choose to either pick individual stocks in these less volatile sectors or stick with diversified mutual funds that track these sectors. 

In addition, another industry worth looking into during a recession is shipping – people still shop for necessity goods and these goods need to be transported.

• Invest in alternative assets

Investing in assets that have a low correlation to the stock market adds to the diversification of your whole portfolio. Consider investment in real estate properties, REITs (Real Estate Investment Trusts), art, wine and other collectibles. 

Investing in rare collectibles might require expert knowledge of that realm. If you are passionate and knowledgeable about particular collectibles, it might be worth looking into.

• Invest in businesses

Do you know some of the world’s biggest, most well-known companies started during the past recessions? Here are a few examples (with their respective recession period): General Electric (The Panic of 1873), Disney (the Great Depression), Netflix (the Dot-com Bubble during late 1990s), Airbnb (2008 Global Financial Crisis) and more. 

When people are desperate at tough times, sometimes they use their creativity and eagerness to invest in new businesses to solve major problems. Some of these great companies have been thriving for decades. 

So if you have a business idea that solves a major problem or see an opportunity to invest in a great business, this might be the time to invest in it.

What not to do during a recession

Now we finish talking about how to invest during a recession, here are some mistakes to avoid:

• Sell in panic and quit investing

• Speculate or time the stock market

• Do not keep a rainy day fund

According to Forbes and CFRA Research, in the past 13 recessions, about half of these recessions periods have actually seen positive S&P 500 returns and most of the following years after the declining-return recession years have positive returns:

Since you never know how and when the market is gonna react, it is dangerous to speculate the market or quit investing at once. You only lose money when you buy high and sell low.

Another common mistake people make during a recession is not saving enough. It is always a good idea to keep a rainy day fund in case you lose a job or have health issues that could dive deep into your savings during economic downturns.

Above all, life goes on

A recession sounds intimidating. But at the end of the day, we still live our lives during a recession or not. The silver lining of the story is that recessions can also present opportunities. And those opportunities favor the ones who are prepared. 

Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational and entertainment purposes only.