Sure, you’re grateful to have some wealth behind you as the world goes to pot — but what if your investments don’t make it through the recession and you lose everything?
You have the global pandemic, US elections, and who-knows-what-else to contend with.
It’s tempting to hold off on investing until all this blows over. Is that the right approach?
The answer, plain and simple, is no. Recessions provide a unique opportunity to make big money and grow your wealth — if you know what you’re doing.
I wrote another post on how to invest 100k and assumed the economy was doing well so now I want to talk about the downturn in the economy and how to best position yourself to profit.
Here are my top suggestions for investing 100k over the next one to three years.
What lower rates during a recession mean for investors
The days of high bank rates are long gone. Ever since the 2007/8 financial crisis, the Fed funds rate has scarcely risen above 3%, and other developed countries have followed a similar trend.
After COVID-19 brought fears of a recession, central banks cut rates even further. The Fed reduced its fund rate down to 0.25% in March 2020, while the Bank of England went as low as 0.1%.
What does this mean for investors like you?
When a recession looms, central banks often reduce their rates to stimulate the economy.
Lower central bank rates lead to lower interest rates on savings accounts, mortgages, and other loans — in theory, people will use their money rather than save it.
We can already see the effects. For instance, in the US, the average money market interest rate is just 0.09% APY.
You’re not going to beat inflation with that. During a recession, it’s more important than ever to put your money to good use and invest it instead of keeping it sitting in a bank account.
In investing lingo, we talk of “bull markets” when the market is rising and “bear markets” when the market is falling.
Both are normal stages of the economic cycle. After the longest bull market in history from 2009 to 2020, experts have long braced themselves for a severe bear market. Now, it’s arrived.
If only you could get the returns of a bull market during a bear market, right? Well, you can. By using an inverse ETF.
I recommend ETFs as one of the best ways to invest 100k under normal circumstances. If you don’t fancy analyzing which individual stocks or assets will perform best, it makes sense to pour your money into a market that has historically performed well — like the NASDAQ based ETFs — and hope to achieve similar returns.
In the short term, recessions ruin that plan — unless you use an inverse ETF instead.
How inverse ETFs work
Returning to the previous example, buying an ETF of the NASDAQ means that, whenever the value of the NASDAQ increases, the value of your ETF will also rise.
Conversely, when the NASDAQ declines, your investments will too.
Invest in an inverse ETF of the NASDAQ and you’ll get the opposite result — effectively, you’re betting against the NASDAQ.
This seems like a very logical move during a recession, but there’s one catch. The stock market has always increased — not decreased — over time.
It’s only wise to bet against its success in the short run; predicting a rebound is pure guesswork.
For instance, let’s look at how the S&P performed over March and April this year. It was at 2237.4 on 23 March, yet the next day it had increased to 2247.33.
That recovery continued, and by 9 April it was at 2789.82. Granted, this was a particularly volatile period, but it goes to show that timing the market is tough.
Inverse ETFs aren’t for the faint of heart, but they can be one of the best ways to make returns during a recession. If you’re interested, here are some recommendations.
However, if you’re looking for a safer strategy or you’re happy to invest your money over the long term, it may be better to invest your money elsewhere.
The stock market offers discounts during a recession
It’s easy to look at the stock market performance over the last few months and think a recession is the worst time imaginable to invest. After all, you don’t want to lose your hard-earned savings.
In reality, people make an awful lot of money by buying into the market at its lowest point.
If Apple announced tomorrow they were having a sale and selling off brand new iPhone 11s for $100, would you consider buying one? Probably. The same idea applies to the stock market.
Since the value of the market generally increases over time, temporary declines during a recession are effectively a sale. If you’d invested $100,000 in the S&P in 2007, it would have increased to $426,388 by 2018. Not bad!
Sound good? Consider an ETF or mutual fund.
However, unlike reverse ETFs, it will take a while for you to see the benefit of your investment. It could take years for the market to recover fully, and longer for you to make the most significant returns. Besides, there may be better options.
The best stocks to invest in during a recession
Every recession has winners and losers. From American Airlines to J. Crew, various companies are going under as a result of the pandemic.
Meanwhile, firms like Netflix, Slack, and Zoom have benefitted from the lockdown.
If you can predict the next winners before everyone else, large profits could be yours. Or, if you can predict which currently struggling companies will bounce back, you could make a killing.
Naturally, it’s easier said than done. I wish I could give you a failsafe analysis of which stocks will perform well in the future, but I don’t have a crystal ball. Instead, here are some general considerations.
Stocks that remain stable during recessions
There’s more to investment than the stock market, and many people prefer to turn elsewhere during a recession. What other options are available to you?
Gold is a safe haven investment, meaning it performs well during periods of uncertainty. This has held true so far, with the demand for gold going through the roof over recent months.
What about fixed income? Recessions are one of the few points in times when fixed income investment could actually make sense.
Still, US treasury bonds only offer annual returns 0.6% over 10 years right now. Significantly less than what you can expect from a “discounted” stock, but it beats sub 0.1% interest rates or negative returns.
If you’re considering delving into oil investment, you probably haven’t been keeping up with the news recently.
With travel and general consumption down, we’ve witnessed some huge lows in oil prices. Although there are signs of recovery, demand is likely to remain low.
Another investment to weigh up carefully is real estate. If the world shifts to remote working, fancy commercial leases are unlikely to be profitable, as it makes more sense for companies to shift to cheaper bases — or no physical base at all.
However, if house prices fall, there’s certainly a case for investing in residential properties. Especially if governments provide further incentives, like the UK scrapping stamp duty.
There’s no magic answer for safely investing 100k during a recession. But if you’ve been sitting on the fence about investing a lump sum for a while, now’s the time to buckle up and start paying attention. Investing when prices are low is too good an opportunity to miss.