Many People Make Substantial Gains By Investing During a Recession. You Can, Too, If You Avoid These Common Pitfalls
Recessions can cause many investors to seek shelter from the financial storm and avoid investing. However, there are gains to be had for those prepared to ride out the rough seas of economic turmoil.
Of course, the uncertainty accompanying a recession means markets can fluctuate wildly. Consequently, there are opportunities to be had, but you should avoid some common investment pitfalls. Planning for your long-term future is crucial; take on expert advice from a specialist such as Portafina.
3 Common Pitfalls When Investing During a Recession
A recession is defined as a minimum of two negative economic quarters during which economic activity, GDP, and sales decline. During a recession, the stock market tends to fall.
There are a few common errors people make when investing at these times, including the following:
1. Don’t Invest When You Have No Savings
Even though a recession provides outstanding investment opportunities, it is not the time to put all your capital in the stock market. The uncertainty of an economic downturn means it is even more critical to have the life raft that an emergency fund provides.
If you don’t already have one, you should build an emergency fund before investing. Having a partial fund enables you to split your available funds between investment and continuing to grow your emergency pot.
2. Don’t Touch Your Investments in the Short Term
Investments are unpredictable, particularly so during a recession. Even if you think you’ve purchased a stock at its lowest point, it can still decline in value. Of course, it should recover, but that recovery may take some time.
It would be best to consider investing during a recession as a long-term venture. As such, you must be prepared to leave your investments alone and not be tempted into a short-term knee-jerk reaction because of early losses. Showing such patience will allow the market time to stabilize and your investments to recover and grow.
3. Avoid High-Risk Stocks
Certain stocks are too risky to consider as an investment during a recession. Even though they seem like an incredible opportunity, some companies present too much bankruptcy risk.
For instance, those companies that trade in cyclical goods and services, such as hotels, cruise lines, and other luxury items. When a recession kicks in, these products are often the first that consumers give up. The pressures of a severe economic downturn can place extreme pressure on companies in these sectors, often sending them into liquidation.
Conversely, non-cyclical (defensive) stocks tend to perform well during a recession, according to investment experts Investopedia. These companies trade everyday essentials such as energy, food, and pharmaceuticals. As there is always a demand for these stocks, you can continue to gain during a recession.
Other stocks that prove too risky for investing during a recession include high-leveraged companies. These firms have high debt levels with potentially crippling interest rates. These can place an unsustainable burden on some companies, leading to bankruptcy.
Recessions are times to be cautious, but you can still put your investments on hold. Indeed, there are plenty of opportunities to make considerable gains during an economic downturn. Understanding these common pitfalls will help you maximize your investments during these uncertain times.