The Best Investments in a Recession

9 of the best investments to make during a downturn

Economies tend to move in cycles. Economic downturns are a perfectly normal, albeit uncomfortable, part of the economic cycle.

There have been plenty of downturns in the past, each caused by different reasons.

Just like the changing of the seasons, each past recession or downturn has been followed by a bounce back in general economic conditions, and investment markets have gone on to reach new highs. Rough economic times might stand out because of:

• Business failures
• Job losses
• A drop in the property market (real estate)
• A volatile stock market
• General negativity and bad sentiment

Such times can present great opportunities for anyone with patience. Understanding what those opportunities are and how to take advantage of them can leave you poised to succeed when good economic times return… as they always have done.

The Mental Game: When a Recession Hits

The most important tool in your investment kit during a downturn or recession isn't a stock chart or a financial newsfeed; it’s your psychology.

In times of a recession or general economic slump, it’s easy to feel like a victim of external forces beyond your control. But the truth is, while you can't control the markets or economy, you can control your response to it. You can control your mindset, your saving habits, and your investment strategy.

When the market is in a frenzy or bad news is plentiful, the smart among us stay calm. The late great Sir John Templeton famously said about investing, "The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell." This philosophy was also a cornerstone for the legendary Warren Buffett, who famously advised investors to

"Be fearful when others are greedy, and greedy when others are fearful."

It's a simple idea but executing it is anything but. It means resisting the herd mentality and seeing a drop in prices not as a loss of value, but as a discount.

Think of it this way: when was the last time you saw a "50% off" sign at your favourite shop and decided to stay away?

Why should your approach to investing be any different? When it comes to the stock market at least, a market downturn is the stock market equivalent of a flash sale, and the truly savvy investor is the one who comes to the party prepared.

Read on if you’re looking to make the most of the opportunity and become one of the winners in a downturn by making one or more of the nine best investments at a time like this.

What To Invest in During a Volatile Market or Recession

1. Yourself

It’s always a good time to invest in your most valuable asset: yourself.

Regardless of what the economy is doing, set yourself up for future success by investing in yourself.

This doesn’t have to be a 10-year part-time bachelor’s degree either! If you don’t want to attend university, certificates can help you break into a new career or increase your income. There are plenty of in-demand jobs which you can train for with online courses, and plenty of professional online training systems to help you learn an array of skills in your own time, such as Udemy, Cisco, and LinkedIn Learning. Even just reading books and watching YouTube videos can be a great source of knowledge.

2. Set and Forget Investments

One of the most effective and stress-free strategies for navigating a downturn is a practice known as dollar-cost averaging. It sounds fancy, but it’s quite simple.

Instead of trying to time the market, you invest a fixed amount of money at regular intervals. This means when prices are high, your fixed investment buys fewer shares or units in managed funds such as KiwiSaver. When prices are low, the same amount of money buys more shares. Over time, this averages out your cost per share and takes the guesswork out of investing. 

You’re essentially getting the benefit of a downturn without having to actively decide when to jump in. This disciplined, automated approach removes emotion from the equation, which is precisely what most people struggle with when markets are volatile.

3. Shares

An uncertain share market offers excellent buying opportunities for people who like investing. As mentioned earlier, this is often compared to a clearing out sale at your favourite store, as the downturn might enable you to buy shares at a significantly lower price than usual!

Picking individual shares to invest in can be difficult at the best of times, so most people who buy shares directly focus on well-established companies or blue-chip stocks.

If you have the funds and stability in your income, buying shares in companies, even if you see some short-term losses, can help you build long-term wealth.

4. Managed Funds

These sorts of funds are invested like most KiwiSaver Schemes, with one key advantage: you can get your money back at any time. During turbulent times, diversification is essential to reducing risk. Funds make it easy to diversify compared to only buying shares in a single security (company).

Unlocked managed funds can hold shares in hundreds of different companies spread across the entire market or can focus on specific sectors of the economy. They can also hold other assets like bonds, property, and a little cash.

You can select a fund based on your desired asset allocation or risk tolerance. This means you might invest in a fund that holds only bonds if you want to play it safe, or you can put money in an aggressive fund that holds nearly all shares if you don’t mind the bumps as the economy recovers.

5. Cash

While you may be looking for opportunities, a downturn is also a good time to make sure your financial foundations are solid. This means having a sensible allocation to "safe haven" assets. These are investments that tend to hold their value or even increase during periods of market stress.

In economic downturns, cash is king. A sum of cash offers you great liquidity, that is, the ability to access those funds. Liquidity in the form of a ready sum of cash allows you to pounce on opportunities and weather unexpected expenses.

Cash is one of the most flexible asset types, and it’s incredibly safe if kept at a major New Zealand bank. Of course, cash doesn’t offer the returns that nearly all other investments can.

Despite the drawbacks of cash, holding some does offer the opportunity to redeploy money into new opportunities as you find them, and you can always use the cash to cover expenses if you lose your job or experience a financial emergency. Maintaining a healthy cash reserve in the form of an emergency fund is a crucial practice even in good times. Bolstering your cash reserves in a weak market can help you weather any storms you may face.

6. A Business

When the market is doing poorly, it might seem crazy to start a business. If established companies are struggling to survive, how can a new one succeed?

But, some of the world’s most famous and successful businesses were started during recessions.

So, if you have the time and inclination, have a think about what opportunities might be around you.

Plenty of side businesses or side hustles don’t require significant cash investments and can turn into a full-time career. Even if you don’t take your business full-time, it can turn into a second source of income and make it easier for you to ride out any economic uncertainty.

7. Real Estate (Property Investment)

Property investment has long been a Kiwi favourite.

When the economy falters or interest rates rise, or both, real estate prices also tend to drop over the near team.

Over longer timeframes, when economic certainty returns, it’s likely that property prices will continue their upward trend. So, anyone in a good position to buy could currently find themselves in a great position to secure property at discounted prices. This could be people with cash reserves, stable employment prospects, or plenty of equity built up in their own homes.

Even if you just buy a home you intend to live in for the long-term, buying in a weakened market is still a wise move. With time, you’re likely to build equity faster.

8. Precious Metals

Some investors like to use precious metals, like gold and silver, as possible protection against economic shocks and inflation. The idea is that these metals retain some form of value even as inflation erodes the value of currencies.

Related material:

• Recession-proof businesses
• How to prepare for a downturn
• Warning signs you're in financial danger
• Deal with financial uncertainty
• Kiwis spend more on Lotto than on all major fast food outlets combined, how do we better financially empower ourselves?

9. Bonds

Few people invest directly in bonds anymore, though most people invest in them to varying degrees without even considering it through most KiwiSaver Scheme fund choices.

Bonds have traditionally served as a safe harbour during most economic storms which occasionally occur.

Bonds tend to perform well when interest rates fall, which often happens during recessions. Stick to high-quality, investment-grade bonds to avoid default risk.

The Bottom Line: Best Recession Investments

An economic downturn can make investing or financial matters scary, but there’s no better time to strive to improve your financial situation. This is two-fold:

1. Invest in yourself or in a business to enhance your economic prospects as the market improves, and
2. If you have the resources, buying property, shares, or investing in funds can help you build a successful portfolio than can gain value as the economy recovers.

If you’d like to discuss how to take this opportunity with one of our wealth management specialists, get in touch to book a complimentary initial consultation. It would be our pleasure to assist.