Investing in 2020 has been a wild ride so far. We have gone from all-time stock market highs to learning how to invest during a recession.
That urge to sell everything and go 100 percent cash is tempting. But investing during a recession is one of the best ways to earn passive income. Bear markets make it easier to “buy low and sell high” if you’re patient.
Buying the best investments during a recession can be one of the best times to invest. You may also consider stock market alternatives as they can be less volatile than the market.
Stocks That Do Well During a Recession
Investing in “recession-proof stocks” can be the easiest option. While no investment is risk-free, some industries fare better than others.
Think of what purchases you still make and the unnecessary purchases you avoid. Many households are reducing monthly expenses as you might be.
Some stock market recession investments to consider first include:
- Discount stores
- Warehouse clubs
- Consumer staples
- Companies with little or no debt
- Stocks with a long dividend history
Stocks with share prices that decline less than the broad market is a good indication. You may also consider buying “dividend aristocrat” stocks as these companies usually have a large cash balance and are well-run.
Because many high-quality stocks are “on sale,” you might invest small amounts of money in multiple names. Buying small amounts can help you manage downside risk as well.
Please don’t take the above as recommendations, but examples of what tends to do well during an economic downturn.
How to Get Help with Your Investing in a Recession
Figuring out how to invest during a recession isn’t a solo effort. You may decide to sell everything because of uncertainty and miss the uptrend once the bear market ends.
While you can make money by only investing during a bull market, your most substantial gains may come from investing during a recession and buying quality stocks.
A Charles Schwab study confirms investors who “dollar cost average” can earn more than those who try timing the market.
This isn’t the first recession for seasoned investors, and they know how to invest in a recession. You can use their experience to make an investment strategy.
Your current 401(k) provider may offer webinars, tools, and advisory services for guidance.
You also have several options as a DIY investor while avoiding high investing fees.
Betterment is a great option when you know investing is important, but you don’t have the time or desire to manage your portfolio.
This robo-advisor invests in multiple asset classes via index funds and automatically rebalances your portfolio.
You should consider M1 Finance if you’re comfortable picking your own stocks and funds. It’s possible to buy fractional shares without any account fees or commissions.
M1 Finance also offers pre-made stock and bond funds that can make DIY investing easier.
5 Top Alternative Investments for a Recession
Not all recession-proof investments trade on the stock exchanges. This list of alternative investments lets you invest in physical assets to diversify your portfolio.
These alternative investing ideas may require a longer investing period of up to five years. But their asset prices can be less volatile.
1. Investing in Real Estate
One of the best alternative investments can be real estate assets like multifamily apartments.
Many consider rental properties as one of the best recession-proof industries to invest in as people need places to live, and businesses need office space.
Normally, you must be rich to own real estate or have time to self-manage the property.
Real estate crowdfunding lets you invest as little as $500, and a property manager can handle the maintenance. You can earn annual dividends of at least eight percent.
This dividend yield rivals the historical annual return for the S&P 500 index.
Consider these three real estate investing platforms first:
- Fundrise: Invest as little as $500 into multifamily and commercial real estate
- Roofstock: Buy turnkey single-family rental properties
- Streitwise: Invest in office space starting with $1,000
All three of these platforms are open to non-accredited investors that “earn an average income.” One downside to platforms like Fundrise is that you can’t decide which properties you invest in.
But you invest in real estate investment trust (REIT) that invests in properties across the United States.
Accredited investors can handpick individual offerings. On Roofstock, accredited investors can buy fractional shares in single-family rental homes.
Related: Read our Fundrise review to learn more about how real estate crowdfunding works.
2. Investing in Farmland
If you already invest in residential or commercial property, you might consider farmland investing. People and animals are always going to eat, no matter what the economy is doing.
FarmTogether lets accredited investors invest in US farmland with as little as $10,000. The minimum investment period is five years but can be longer.
You can earn income by leasing farmland to farmers who grow cash crops, including hazelnuts, mandarins, and almonds.
Appreciating land values can also increase your potential profit.
Non-accredited investors won’t qualify for this alternative investing idea. You must have a minimum of $1 million liquid net worth.
Singles with an annual income above $200,000 and married couples with a combined $300,000 minimum income can qualify.
3. Wine as an Investment
Are you a wine connoisseur? Even if you’re not, fine wine is another asset that’s uncorrelated to the stock market. Vinovest lets you invest in quality European wines that can appreciate with age.
Vinovest stores the bottles you own in climate-controlled cellars in countries including France, Switzerland, and the United Kingdom.
The minimum $1,000 investment portfolio holds between 45 and 60 bottles.
Vinovest will mail you bottles of your investment wines to enjoy for an additional fee.
You can build a custom portfolio with an expert advisor by investing $50,000 at once. Your annual fee also reduces from 2.85 to 2.5 percent, and you get exclusive access to wine auctions.
Wine may not seem like one of the best investments during a recession as most luxury goods decline in value. All Vinovest bottles have insurance against catastrophic events such as natural disasters.
Your bottles can increase in value as the existing stock diminishes. While Vinovest doesn’t have a minimum investment period, your bottles may take between 30 and 50 years to reach peak value.
This option can be an intriguing way to build generational wealth.
4. Precious Metals
Owning gold and silver is another timeless way for how to make money in a recession. You can’t buy groceries with gold or silver in today’s world of paper currency.
However, the use of these metals as currency and to store wealth dates back to Biblical times.
Precious metal values can increase during recessions as people prefer this time-tested alternative asset. Prices can decrease as investors regain confidence in dollar-based assets like stocks and bonds.
Some investors own gold and silver to hedge against inflation. As paper currencies lose value because of inflation, precious metals can increase in market value.
There are several ways you can invest in precious metals:
- Precious metal ETFs: Invest in publicly-traded ETFs that own physical gold or silver
- Royalty stocks: Earn dividends from stocks that invest in precious metal miners
- Physical gold or silver: Own actual bars of gold and silver
- Physical currency: Collectible coins like American Eagle gold coins or silver dollars
Precious metal stocks and physical bullion tend to be the best investment options.
Invest in Precious Metal Stocks
Buying precious metal commodity ETFs and royalty stocks can be the easiest option. Most free investing apps let you buy fractional shares of these two assets.
Commodity ETFs do not earn dividends, and you make money when the precious metal increases in value. Most gold and silver ETFs don’t let you physically own the bullion, but instead store it in a secure vault.
Many funds are also subject to the 28 percent royalty tax instead of the maximum 20 percent capital gains tax rate for index funds.
Gold royalty stocks are the simplest way to earn dividend income from precious metals. These companies buy stakes in mining projects.
As the senior or junior miner digs for gold, the royalty company earns a piece of the profit. These stocks are also less volatile than directly investing in mining companies.
Buying Physical Gold
If you want to own physical gold, Vaulted is one of the most accessible options. You can buy fractional shares of physical gold bullion.
A single ounce of gold costs approximately $1,700 in May 2020. Buying in $10 increments is an easy way to invest your spare change.
Vaulted stores your bullion at the Royal Canadian Mint. You can also have Vaulted deliver gold 99.99 percent bull bars ion to your house via FedEx.
You pay a 1.8 percent transaction fee to buy or sell your gold. This fee is pricier than buying gold ETFs, but this fee is typical when buying physical bullion or coins.
Vaulted also has a 0.40 percent annual account fee, but gold ETFs have similar expense ratios.
Precious metals can also be easier to sell than other alternative assets.
5. Invest in Yourself
Improving your skills to make more money is an excellent idea too. Perhaps the last few weeks give you an idea of the best recession-proof businesses.
Your side business may eventually replace your current day job income.
Side hustle apps can help you make short-term income but require more effort. Trying different side hustle ideas helps you discover what your strengths are.
How to Manage Investing During an Economic Collapse
The quick stock market decline starting in February 2020 shows the importance of a diversified portfolio. Most asset classes went down in value as investors sold to raise cash.
But the damage was less extensive for high-quality assets.
Practicing these tips can help you learn how to invest during a recession.
Don’t Sell Everything
Market corrections and negative news headlines may want you to sell all of your assets until conditions improve. Selling everything can cause you to “time the market.”
However, calling the bottom is extremely difficult. Even the expert investors can’t accurately predict market tops and bottoms.
Asset prices may rebound sooner than you think, and you miss the easy gains. You may decide to wait for the next correction.
Only holding cash may force you to delay retirement as bank account interest rates are lower than potential market returns.
Grow Your Cash
Asset prices can be volatile during a recession. It can take several years for your potential investment losses to turn into gains.
Continue investing, but consider setting aside more cash for near-term expenses.
A high-yield savings account earns interest while stocks may have negative annual returns. The first $250,000 in bank accounts are FDIC-insured in the unlikely event of bank failure.
If a good investment opportunity arrives, you can invest some of your cash. Since you have more cash than usual, your emergency fund is still well-stocked.
Know Your Investment Plan
A sound investment plan can prevent panic selling and buying bad investments.
You may use trailing stops for your individual stocks to limit risk. For example, you sell a stock if the share price declines by 25 percent.
A well-thought plan can help you use your cash to buy quality recession investments trading at a discount.
Don’t Be Afraid to Consider Alternatives
Diversifying is a terrific way to reduce risk and earn passive income. Stocks are a good option for many because they are easy to trade.
Also, consider alternative assets that can earn income during a recession. You may start by investing in real estate because you have many options.
Many platforms invest in single-family homes, student housing, or commercial properties.
Exploring other stock market alternatives can be worth your time. Make sure you understand how the alternative asset makes money and the potential risks before buying.
How to Make Money in a Recession: Bottom Line
Investing during a recession can feel impossible. Buying the best investments during a recession can result in larger gains once the uptrend returns.
Investing during bull markets and bear markets helps you earn long-term gains and avoid panic selling.
What alternative investments are a good fit for your portfolio? Are you making any changes to your investment plan? How has your investment plan helped you invest during a recession?
Source: Frugal Rules