Types of Investment during Recession - Essay Example

Types of Investment during Recession s Types of Investment during Recession Recession refers to a prolonged period of decline in economic activity that results in negative growth of the gross national domestic product, consumers and businesses weakened confidence, reduced employment, incomes, sales and production. Ones future is impacted mostly by the moves made during hard times to invest but the good ones. Different approaches are required during recession that help one survive the tough economic times and also make a profit from those conditions. For a particular investment to be successful, the investor should consider the different strategies for investment including consistency, buy, recession-proof stocks and safety (NBER, n.d) Consistency Most Investors panic in recession, and in an effort to avoid loss, they sell their shares to put their money in a different place. Having a level head, and confidence that markets go up helps stop investors from panicking. Buy Stock prices fall drastically during the recession and thus it as a chance for investors to buy expensive stocks at discounts, which might seem as getting onto a sinking ship, but it is a chance for investors to set themselves up for big returns after a rebound of the market. Recession-proof stocks Businesses that invest in cheap goods and services see their profits rise during hard times since people turn to them to save money. Safety It is better to invest in safer places if one is not for the risk. Stocks offer the highest profits than the certificates of deposits and bonds but carry higher risks. Slow and dependable growth during a recession is a welcome relief for investors, thus make the safer investments attractive. Any investment strategy should not involve liquidating all ones assets. The stock market depends on investors and thus a large-scale pull-out worsens the recession (Smart investment strategies during a recession, n.d). This paper discusses the best investments that people should choose during recession. 1. Investing in Gold Traditionally Gold is seen as a safe investment and even during times of financial uncertainty, depreciating exchange rates, high inflation and economic recession. Gold has an intrinsic value while currencies such as the dollar and sterling pound can depreciate or lose value. Currencies depend on the countrys economy, for example, the sterling pound varies with the stability and strength of the UK economy. Gold is seen as a better investment than investing in stocks during recession since stocks of companies make fewer profits than gold. Thus, Gold is a safe investment for preserving the value of assets, which encourages speculative purchasing of gold as a move to diversify out of the riskier investments. Gold is also attractive to invest in during periods of negative real interest rates, that is, when the inflation is higher than the interest rates and thus discourages saving in banks and thus encourages investing in gold. Gold did well during the Second World War and the great depression making it a safe investment during a recession (Pettinger, 2008). 2. Foreign currencies It will be more attractive for investors to invest in foreign currencies when the U.S economy weakens resulting in the dollar losing value. Investors consider it as an opportunity to own blocks of foreign currency. Currencies provide an exceptional diversification tool and hedge against a falling dollar due to different pricing mechanisms and low correlation to other assets that are based on the dollar. The Euro and particular Asian currencies are better choices for investors determined to diversify into other currencies since the Euro is liquid, and several Asian currencies are maintained at lower value than the dollar so as to boost their economies. From the global investor point of view, foreign currencies are an attractive investment during a recession since they offer diversification including forex investment market due to their low correlation among themselves and with other assets (Zimmerman, 2008).. 3. Investing in real estate Real estate is a prime investment during a recession and thus during financial uncertainty the real estate investors should focus on cash flow but not on the appreciation. Appreciation is a significant of profit for investors, but it is easier to see cash flow since the numbers will only work from the start, or they will not work. Cash flow is also a key factor for people seeking to invest in high-income properties. Locations that have lower home prices have positive cash flows (Zimmerman, 2008).The value of properties and homes may depreciate during recession, but an investor can make money by turning the rental properties into rentals. One should buy properties that they are able to pay within the shortest time since properties sold during recession have a relatively low price, but their overall mortgage rates will be high. 4. Investing in equity in countries that have a low correlation to U.S.A Investing in foreign countries whose economies are not tied to U.S.A economy will be helpful for investors seeking to diversify their portfolios during recession. As the dollar declines, investors take a global approach to asset allocation and portfolio construction. The Oceanic and Asian markets have a low correlation to the U.S stock market and thus are appropriate locations for foreign investments. Investors may also get invest in foreign stock exchanges in getting involved in the foreign equities. Certain foreign stocks can be bought and sold online through the Electronic trade for foreign stocks (Zimmerman, 2008). 5. Investing in timber and similar agricultural products The value of timber increases with time and; thus, it is considered as a high-demand commodity. It is a solid commodity that is not correlated to the market and thus fairs well during declines in the stock market. Timber returns outweigh the market and its value increases with time, even without the investors input. Land acts as a principal while timber acts as a perpetual dividend and thus investment in timber that is ownership and harvesting is a fixed-income investment. Timber consistently and significantly outperforms the market bringing a stabilizing influence to a portfolio and the log prices that increase over time. Investment on timber protects the investors capital and has a significant return on investment. Timber investment can be done in various ways including purchasing of land, investing in publicly-traded companies such as timber investment management organizations and real estate trusts. Fractionalized timber investments that are cheap are also available in foreign countries including Panama and New Zealand (Anderson, 2008). 6. Investing in precious metals such as silver and platinum Precious metals are a safer investment during a recession for those opting out of the stock market. In the past, many currencies got tied to precious metals that led to their solidification in their place as a currency hedge. The precious metals correlate fairly to each other and the stock market but do not absolutely make the ownership of each metal a safe diversification option. There is a growing demand for Silver by the industrial sector, which helps edge up its price. There is also a steady demand for platinum by the automobile sector and due to its limited availability; its prices have increased over time. Investment in precious metals can be done in a number of ways including mining stocks, physical precious metals, exchange-traded funds and derivatives (Ganz, 2011). 7. Investing in stocks During a recession, people should invest in stocks with companies with high-cash flows and long business history since they are better placed to maintain profits and production during a recession. Companies with little debt, strong cash flows and balance sheets can handle long periods of weak markets and also do better than those with huge operating debts and reduced cash flows. People should also buy stocks from companies that manufacture household commodities. Investors may lose their money during a recession if they bought stocks from companies that specialize in technical gadgets since the consumers could hold off on buying those products. Companies with strong balance sheets and cash flows can handle an economic downturn and still fund their operations through the weakened economic times. The companies with weaker budgets may collapse due to problems in payment of debts and operational costs (Thomsett, 2011). 8. Investing in commodities Commodity markets are a safe investment during a recession. Companies and developing economies need natural resources or inputs. The need for natural resources grows as the economies grow and thus the prices of the resources rise. Also as the economy slows, the demand goes down resulting in a decrease in the prices. Commodities are traded globally and thus resources such as gas; oil and steel are not affected directly by recession. People should also invest in food products that are in constant demand. Food products such as corn, sugar, rice, and other foods are continuously bought regardless of the state of the economy (Zimmerman, 2008). 9. Investing in fixed income or securities Fixed income investments are safe during recession because they have low risks than investments in mortgage-backed securities and corporate bonds. Fixed-income investments include municipal notes, certificates of deposit and treasury bills. During a recession, people invest in bond funds as they try to avoid risk selling their portfolios while they are still on the positive side. Various bonds outperform during tough market conditions, and they include: a. Federal government bond funds Bond funds are a safe investment and funds made up of treasury bonds are the safest because investors face no risk since the government levies taxes and prints money eliminating risks of default and providing protection. b. Municipal bond funds They are issued by the local governments, and they leverage the local taxing authority to provide security and safety to investors. They are riskier than the funds invested in securities protected by the government, but are considered to be safe. c. Taxable corporate bond funds They are issued by corporations and have higher yields than the government issues. They carry more risk and thus selecting in a fund that seeks to invest in high-quality issues helps lower ones risks. d. Money market funds Money market funds provide a safe investment but should not be used for long term investment. They are attractive to conservative and unsophisticated investors (Simko, 2013). Conclusively, when one has a long duration time frame, he or she should take a down market as an opportunity to build his or her portfolio at a discount rather than selling when the prices fall. References Anderson, B. (2008, January 9). Top 5 Recession Investments. Top 5 Recession Investments. Retrieved from http://www.nuwireinvestor.com/articles/top-5-recession-investments- 51400.aspx Ganz, D. L. (2011). Gold shines through history. The essential guide to investing in precious metals: how to begin, build and maintain a properly diversified portfolio (pp. 51-68). Iola, Wis.: Krause. Ganz, D. L. (2011). platinum andpalladium join the club. The essential guide to investing in precious metals: how to begin, build and maintain a properly diversified portfolio (pp. 85-94). Iola, Wis.: Krause. Pettinger, T. (2008, October 27). Investing in Gold During Recession. Economics Help. Retrieved from http://www.economicshelp.org/blog/857/economics/investing-in-gold- during-recession/ Simko, S. P. (2013). Strategic fixed income investing an insiders perspective on bond markets, analysis, and portfolio management. Hoboken, N.J.: Wiley. Smart Investment Strategies During a Recession. (n.d.). Answers.com. Retrieved July 15, 2014, from http://investing.answers.com/investing-101/smart-investment-strategies-during-a- recession The NBERs Business Cycle Dating Committee. (n.d.). The NBERs Business Cycle Dating Committee. Retrieved July 15, 2014, from http://www.nber.org/cycles/recessions.html Thomsett, M. C. (2011). Getting started in stock investing and trading. Hoboken, N.J.: Wiley. Zimmerman, C. (2008, January 3). Top 10 Cash Flow Property Markets. Top 10 Cash Flow Property Markets. Retrieved from http://www.nuwireinvestor.com/articles/top-10- cashflow-property-markets-51396.aspx Read More