Investing in a recession

Making lemonade with the lemons life gives you

The last few months have not been good for investors. Stock markets worldwide have fallen, in some cases sharply. Central banks have raised rates causing bond prices to fall. Crypto has been decimated. Less liquid markets like mortgages are slowly becoming illiquid.

What does one do?

There are a few approaches that you can take depending on your risk appetite, investment horizon and liquidity.

Hold the line

Even economists have been wrong about the length and severity of recessions before, but the consensus so far about this one is that it will be shallow and short.

If you are in no hurry to liquidate your investments, you can ride it out, and even add a little to it along the way. If you have SIPs ongoing and are not cash strapped, keep them going.

Switch to defensive bets

This might sound like it’s already too late to do so given how much some markets have fallen, but it really isn’t.

Not all investments are equal in a downturn. Growth stocks, small caps, crypto, etc. that have all prospered in an up market will fall the most in a down market. Every asset class has its version of defensive bets. For stocks, it’s large cap indices in developed markets, or specific sectors such as healthcare or consumer staples or dividend stocks. For bonds, its short and ultra-short term debt.

Depending on your risk appetite, it’s always worth shifting some of your investments into defensive bets even if the markets have already fallen sharply. The key here is you don’t know the bottom of the market. You can’t really time the market. What you can do is to hedge your bets and be prepared to come out better if things end up worse than you anticipate.

Do some spring cleaning

All boats rise with the tide. If you’ve been invested for the last few years, you’ve probably made good money even if your investments have performed unevenly. Up cycles are forgiving on mediocre investments but down cycles are brutal.

This is a good time to take a good look at your portfolio and switch out some of the lower performing assets. Consolidate on the ones where you have a strong reason to retain. In investment terms, revisit the thesis for each of your investments and switch out of the ones where that thesis isn’t valid any longer.

Build your emergency buffer

Recessions bring along job losses. If you don’t have a sufficient buffer of cash or cash-like instruments, this is a good time to build it. Doing so when this is an option, not an imperative gives you the time and bandwidth to take good decisions and work on their timing. Doing so when your back is against the wall will result in fire sales and bad returns.

Add some precious metals

Gold (and others) have acted as a store of value during recessions, sometimes even rising when every other asset class has fallen. I am not a fan of having these as long term investments, but having a portion of your portfolio switched over to precious metals in a downturn is a good strategic option.

Learn from the past

Remember that the best opportunities to buy exist when every one is selling. We have been ‘blessed’ to live in a time when financial crisis after crises has hit us in the last two decades, so there is a wealth of data to study.

Economic indicators, sector specific performance, correlation between asset classes, etc. are all good areas to read up on, and they can help you navigate and even prosper under such circumstances.

A final suggestion is to build a list of investments to switch back to when things improve. These are possibly the same ones that have crashed the most, but more specifically, these are the ones that are expected to grow the most when the economy improves.