Investing during a recession

Most people think that during a recession, the best thing you can do is stop spending, and cut back as much as they can. This is sound advice because recessions often lead to layoffs, and to tough times financially. However, this does not mean that you should avoid investing completely. While there are risks to investing during a recession, it can also be a good choice, but is never a good idea if you are using money you need to pay bills, or buy groceries. Investing, whether in a recession, or not, should be done with extra money.

The first rule for investing during a recession is to only invest extra money. When times are tight, you should not invest money that you may need for your car payment, your house payment, or to buy food for your family. One of the best ways to ensure that you are not investing money you will need later is to first pay your bills, and then pay yourself. This means have a savings account, or emergency fund, that way if you do lose your job, you can pay your bills until you find another one. Extra money is the money you have after your fridge is full, your reserve fund is enough to cover 3-6 months of living expenses, you are out of debt, and your bills are paid in full. So, while investing during a recession is not all bad, it should not be your first priority, your first priority needs to be getting more financially stable, and the only way to do that is to use the money you have wisely. Once you are stable, then you can invest.

The second rule for investing during a recession is choosing the investments based on your tolerance levels. For example, if you are not going to be able to keep yourself from checking the markets all of the time, and if you can't stop yourself from knee jerk reactions to market fluctuations don't invest. One of the biggest mistakes of investing during a recession if your tolerance level is low is that you may get too nervous and divest your investments without giving them a chance to come back up. So, before investing, analyze your risk tolerance, and how long the economy may be in a recession. For example, what stocks are dropping? What do economists say the outlook for the economy is? If it is going to be a long time before the economy turns around, and you can't keep yourself from making emotional decisions about investments, do not invest during a recession. However, if you think you have the job security and the right financial standing to make it through the recession, then investing can be smart. Recession can be a great time to invest because you can buy stocks for significantly lower cost, however, if you will need the money back before the recession ends, or do not have the tolerance to watch your investment value fluctuate, you will end up losing money.

The next thing you want to consider is the best investments to choose during a recession. Most experts would recommend that during a recession you should invest your money in bond funds. Basically the U.S. Treasury is going to keep interest rates relatively the same, which means if you invest long term, you will see a return on your investment. If you have enough money to invest, consider junk-bond funds. They are a great investment during a recession. They offer higher rates of return because interest rates lower, bonds decline, and as an investor, you can benefit from it.

Other good things to invest in during a recession are hard asset items, and things that are going to maintain value. For example, you could invest in things you actually get goods for, or in things that people are going to need regardless of what the economy is like. This could mean food products, like wheat and corn, or even cattle. Other hard assets include gold or precious metals. These are investments that history has shown do not lose value much over the years. In fact, gold has been shown to maintain value as well as even many of the most popular stock options. So, if you have the extra money, then be wise in your investment, but consider hard asset investments.

The next tip for investing during a recession is to diversify in types of investments, as well as invest internationally. If you invest in a wider market than just the US your investments will likely be safer. If you invest internationally, and in several different parts of the world, and diversify your portfolio and investment types, recession will not affect you as greatly. For example, let's say the US is suffering a big recession, but China is booming. If you have investments in both, the growth in the one will help offset the decline in the other, making your portfolio stronger overall. International investments sometimes cost more upfront, but if they are not as affected by a recession here, the initial cost will be worth it.

The next thing you want to consider is converting existing investments into safer investment choices for a recession. A good example of this is to not pull your money out of investments completely, but maybe focus less on stocks, and more on mutual funds. These are often referred to as defensive moves, and they give you the big advantage of greater peace of mind that you are protecting your investments. The downside? They often result in much smaller returns. If you need the money you have invested in the near future this is a wise move, especially since mutual funds, MMA's, etc. can better withstand declines during recession. However, if you do not need to pull your funds out too soon, then leaving them in your current investments is almost always going to be the more profitable choice. So, what are your investments for? Retirement, education, extra money, what? Answering that question, and putting the answer into a time frame should help you to make the smarter investment decisions for your situation during a recession.

In summary, if you can do the following things when the economy is in a recession, and you are investing, you will usually be able to make sound investment decisions:

1. Don't get nervous by the uncertainty or fluctuations in the market.
2. If you trade stocks, be careful how you do it, as you could be making a mistake.
3. Diversify, and go international.
4. Decide if you want higher returns or peace of mind.
5. Make sure you have enough cash for your needs.

The biggest factor to making your investments work during recession is timeframe. You have to realize that long term investing is the best way to get through a recession. The markets will eventually rise again, and the economy will once again bolster and strengthen. However, you have to leave your money invested in order to get the benefits of this. If you panic and pull your money out during a recession, or invest in unstable companies, or faltering economies internationally, then the recession is going to really hurt your investments. If you can ride out the storm, stay consistent, diversify, and choose your investments carefully, then a recession can benefit you.

Most experts agree that being conservative is wise during a recession as it is hard to know what the markets will do, and impossible to really know when the economy will again rise. However, if you have the extra money to do it, you can often buy stocks for low prices during a recession, and greatly benefit from the strong gains that take place when the recession ends. Of course, once again this is going to need to be a personal decision, and one based on your income, your security financially, and your personal outlook about the markets and the economy. Trying to time the markets, or pick the perfect stock is a poor strategy for investing during a recession, and it almost always ends in failure, loss, and hardship. So, remember the risks of recession to areas of your life besides investing, and keep those in mind when you choose your investment strategy.

Do not always bank on being able to wait out the recession, the longer it goes, the more likely it is going to be that you may lose your job, or home, etc. So, it is worth repeating, do not try and time the market, instead do what is best for you and your family based on the worst case scenarios. That way, when and if they occur, you will be prepared.

When investing during a recession, look to history for clues of what to expect, for example, the early `80s saw a recession that lasted for over a year. The stocks declined, but they then eventually rose 35 percent. The early `90s saw the same thing, with a six month period before they rose again. Our current recession is seeing a similar pattern with stocks reaching lower levels then they have been at in years. Many economists say it will be as bad as the Depression, others think it will turn around in a few years. However, the fact is that you just don't and can't know, so instead of trying to figure it out, take a worst case scenario approach, go foreign, and choose areas where there is growth, like technology, healthcare, and energy companies. Even though some experts say the economy should bounce back with the new president, or that tax breaks, and stimulus plans will help end the recession, as an investor, it is wise to think long term, and not count on a near future end to the recession.