How to Invest If You Think an Economic Recession Is Near

We’ve been riding an unprecedented period of growth since the economic crisis of 2008, and for years, economists and speculators have posited that a recession may be on the horizon. Several key recession indicators are currently active, and the stock market has shown signs of volatility in the past few months, thanks in part to fears over trade wars and international political turmoil.

Does this mean a recession is coming in the next few weeks? In the next few months? Nobody knows—not even the best economists on the planet. The next recession could already be underway, or we might see years of further growth before things start to cool. Eventually, a recession will likely come, and when it does, you’ll want to execute a strategy that protects your money as efficiently as possible.

So if you think a recession is coming, what steps should you take now?

Don’t Panic Sell

First, you should know not to panic sell. Every time the stock market drops, there are people with weak stomachs who see a loss and desperately sell to avoid further losses. It’s a way of trying to cleverly time the market, but because the market is more or less unpredictable, it’s a massive gamble. Panic selling commits your losses, and there’s no guarantee stocks aren’t going to rebound the next day. Stay patient, and commit to following your original strategy, even if it means riding out a massive drop in price.

Choose Your Companies Carefully

If you’re investing in stocks, you’ll want to choose the companies and industries most likely to benefit from a recession, and get rid of stocks in companies most likely to be hurt by a recession. As a simple example, you can sell stocks that serve people’s wants, and instead invest in stocks that serve people’s basic needs. For example, luxury brands that sell expensive watches or fashionable items serve wants; people will be less likely to indulge themselves if their net worth takes a 25 percent hit. However, people will always rely on wastewater treatment.

In general, you can count on utility companies and waste management companies doing well in a recession. You may consider moving some of your assets into a utility-based index fund, or a handful of stable companies in this area. Inexpensive food, retail, and entertainment options also do well; for example, you might invest in a dollar store or discount chain outlet if you think a recession is coming.

Rebalance Your Portfolio

This may also be a good time to rebalance your portfolio overall. If you’re feeling nervous about the possibility of a coming recession, that’s probably a sign that you need to reconstitute your investments to more conservative, less risky assets. For example, you might pull out of individual tech companies and instead direct your portfolio to more consolidated index funds.

For most people, the best conservative strategy is investing in bonds and bond funds. These tend to be much more stable during economic recessions, though they have a lower overall return.

Free Up Some Cash

Economic recessions are always temporary. The worst economic recession in recent history, in 2008, had fully reversed itself within 2 years. Rather than seeing this as a loss, see this as a short-term step back on your way forward. Your current assets will recover in time. In the meantime, look at this as a buying opportunity. If you see companies performing well even under harsh economic conditions, it’s a good sign of what’s to come; these stocks will be trading at a steep discount compared to their overall value.

Accordingly, it’s in your best interest to free up some cash. If you think a recession may be near, sell some of your current assets to keep 10 to 20 percent of your account in cash. You may also want to save some extra money on a monthly basis to put aside for a kind of investment “spending spree” should a recession occur.

Remind Yourself of Your Goals

Recessions often trigger drastic and spontaneous activity from inexperienced investors, and it always works against them. The people who mitigate their recession losses, and the ones who actually gain from the experience, are the ones who stay true to their fundamentals and high-level objectives, even under pressure. Take this time to remind yourself what those objectives are, and your fundamental approach to investing.

There are some signs that a recession may be coming soon, but people are always predicting recessions. There’s no guarantee a recession is near, and even if it is, it’s going to be temporary. Be smart when managing your portfolio, and try to make your decisions as calmly and logically as possible; emotional decisions and timing the market will only work against you.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.