Recessions are hard, but they carry opportunities too
Recessions are challenging times for businesses and investors, mainly because many assets take a plunge and portfolio diversification becomes less effective.
But despite the overall decline in the economic climate, recessions do carry opportunities with them.
Investors who know how to take advantage of current economic conditions, even harsh ones, can turn the downturn into an upside potential.
They do so by leveraging assets that perform well during economic contractions.
These assets are known as (relatively) recession-proof assets and often perform better when investors have no appetite for risk.
In this article, we look at the benefits of recession-proof assets and give examples of three types of assets that perform well in a recession: commodities, real estate, and fixed income assets.
Real Estate
Real estate has historically appreciated in value, even during a recession. A real estate investment, such as a rental property, provides a rental income. If the property attracts long-term tenants, the rental income becomes reliable.
When the economy slows, some people may prefer renting over buying, especially if interest rates are high, since mortgages go up.
It’s easy to identify which types of real estate are in demand and which areas are likely to appreciate.
If you’re looking to add real estate to your investment portfolio, you can do so by buying real estate stocks or indices, or CFDs on those stocks and indices.
Commodities
Commodities are raw materials that have a predictable rate of demand and multiple uses.
Because you know that people need these materials, even in a recession, they tend to perform well in economic downturns. Commodities are purchased in bulk, so the price is not affected by the individual choices of consumers.
If you want to invest in commodities, you can buy (or sell) commodity CFDs.
Brokers like easyMarkets offer you the chance to do just that, so even if some commodities are falling, you can enter a short position and take advantage of current market moves.
Fixed Income
When an investor purchases a fixed-income asset, such as a corporate bond or a government treasury bill, they receive periodic payments representing a percentage of the loan amount.
Typically, these payments are expected to increase over the life of the investment.
Bond investors are entitled to fixed periodic payments until the maturity date.
If you currently have a portfolio with a high percentage of equity, you may want to consider adding some fixed-income investments. When stock prices fall, the overall value of your portfolio falls as well.
By purchasing fixed-income investments, you can offset the decline in portfolio value.
Those bonds are usually issued by governments and corporations, and you can buy them directly or by buying bond CFDs.
Conclusion
During a recession, investors tend to reduce their risk by selling stocks and buying government bonds. While these types of assets perform well during a recession, other types of assets also hold their value.
Real estate and commodities tend to be less volatile than stocks during a recession, but in the overall stocks do perform better if you have a long-term horizon.
As long as you are managing risk carefully, your portfolio should do just fine.
