A bear market and high rates of inflation have many people wondering if the country is heading toward another recession. When a recession hits, there’s a decline in economic activity that continues for several months. Sales, income, employment and production all tend to drop during a recession.
Even if the idea of a recession has you feeling on edge, now isn’t necessarily the time to put your investments on hold. Instead, it might be worthwhile to reconsider where you put your money and your long-term goals.
Knowing how you should invest during a recession can help protect your wealth for the future and give you some peace of mind about your money.
What to Know About the Best Investments During a Recession
A standard piece of investment advice recommends building a diversified portfolio. The more varied your assets, the better your portfolio can withstand market ups and downs. Different asset classes respond to recessions differently. Some might fall dramatically while others stay constant or even increase in value.
Another thing to keep in mind when investing during a recession is not to panic or copy others. There might be large sell-offs of certain assets, such as stocks, which push prices and the market down even further. When you start to feel nervous about your assets, remind yourself to “buy low and sell high.”
Before investing during inflation or a recession, evaluating your goals and what you want from your investments is a good idea. You might want to pick more stable assets if you’re approaching retirement. If retirement is still a long way away, consider investing in assets more volatile at the moment.
Finally, keep in mind there are no guarantees when investing. An asset that seems like it will do well can end up losing money, while one that doesn’t look promising ends up gaining. With a diverse portfolio, you’re more likely to win some and lose some, helping you build wealth for your future.
What to Invest in During a Recession
There aren’t any hard and fast rules about investing during a recession, so it’s a good idea to speak with a financial advisor if you’re not 100% sure where to put your money. In the meantime, the following assets can be promising if you’re looking to get a good price and minimize some volatility.
1. Real Estate
Real estate can be an appealing investment choice in a recession for a few reasons. Depending on the type of property you purchase, it can be a reliable source of rental income. When a recession hits, homeownership often drops while the number of renters increases. People always need a place to live, meaning you are likely to find tenants for the property easily.
Recessions can also make mortgages more affordable. Interest rates tend to drop in a recession. Since many mortgages give the option of getting a fixed interest rate, the cost of your property loan will decrease over time due to inflation.
If you want to invest in real estate using a self-directed IRA, there are some rules to remember. The property is owned by the IRA, not you, and you’re prohibited from spending even one night in it. You’re also prohibited from leasing the property to your spouse or any direct descendants.
2. Exchange Traded Funds
If you want to keep some of your money in the stock market during a recession, you might be able to take advantage of reduced stock prices. Known as buying in the dip, buying stocks in a recession when share prices are low can mean greater gains later.
One way to purchase stocks while keeping your portfolio relatively diverse is to purchase exchange-traded funds (ETFs). An ETF is a collection of securities that trade on the exchange. Many track indexes and contain a diverse assortment of assets, such as stocks or bonds. When you buy an ETF, you buy a portion of the fund but not the assets in the fund themselves.
ETFs offer several advantages, such as reduced costs and ease of diversification. They aren’t without their drawbacks, though, such as the fact that the fund could lose value. Some ETFs can be illiquid or hard to sell.
3. Private Lending
Banks often tighten their lending requirements in a recession, making it more challenging for some individuals or businesses to get a loan. Tougher lending requirements can mean people who decide to invest in private lending see a greater return on their investments.
With private lending, you lend money to others through your IRA. You set the terms of the loan, such as the interest rate and repayment length, and you decide how much to lend to a borrower.
Private lending does have some risks, notably the risk of a borrower defaulting on the loan. To minimize risks, review each application carefully before making a lending decision.
4. Precious Metals
When the stock market is down, investors often turn their attention to precious metals such as gold and silver. If you want to invest in precious metals, you can buy actual coins or metal bars of gold or silver. Alternatively, you can purchase shares of a precious metals fund.
Since precious metals do tend to become more popular during economic downturns, you might pay a higher price for them in a recession than at other times.
5. Tax Liens
When you invest in tax liens, you purchase a claim on a property that’s behind on its taxes. During a recession, it’s not uncommon for property owners to fall behind on taxes, meaning there might be more tax liens available. Once you become the holder of the tax lien, one of two things can happen:
- The property owner can pay the taxes due, plus the interest. In this scenario, you would get the money as the lien holder.
- If the property owner doesn’t pay the taxes owed by the deadline, the lien holder receives the deed. You’re then responsible for paying the taxes and interest.
Investing in tax liens can be a relatively affordable way to invest in real estate.
Open a Self-Directed IRA Today
If you want to look beyond the stock market when planning for your retirement, a self-directed IRA might be right for you. Self-directed IRAs are ideal for people interested in investing in alternative assets, such as real estate, precious metals or tax liens. Accuplan has extensive knowledge of the self-directed IRA process and an investing platform that’s user-friendly and intuitive. Contact us today to learn more.
This information shouldn’t be relied upon for investment advice. It is for information and educational purposes only. It is not intended to provide, nor should it be relied upon for accounting, legal, tax, or investment advice.