How to Invest during a Recession

The strategy for financial investing during a recession is different than in a bull market. Extra caution must be taken when the market slumps, even if an investor profiles as a high risk client. Through a down market, it’s a good idea to diversify more and spread out the risk.

During a recession, a shareholder should review their current investment portfolio. If they’re new to the market, start by speaking to an experienced financial consultant. It’s important to look at the portfolio’s diversity. When reviewing the portfolio, here are questions that need to be answered. What percentage of the buyer’s investment is in stocks, bonds, mutual funds or an IRA? Does the investor own stock in a start-up company which may be more risky than a stable fortune 500 Company? It’s good to review the industry dynamics, and learn how the recession will affect one business sector versus another.

For example,let’s look at a 38 year old single woman who has been investing aggressively in the stock market and is a high risk customer with 70% of her cash in the Tech industry. During a recession, she may need to diversity. She could keep the stable, long term stocks, but may need to shift some money from the risky stocks to mutual funds and spread the risk over a number of industries. The client might consider buying some certificates of deposits, and investing in money markets or bonds which are safe instruments during a recession.

Also, it’s important to take an assessment of one’s personal/family goals and needs. The investor should evaluate when the money will be needed. Then they can determine which investment medium will best meet their need.

A home is an important investment and the cost and value can be affected by a recession. Unless it is mandatory, wait until after the recession to sell your home. During recessionary times, it’s not unusual to see the value of your home drop 25%.
A financial downturn can affect mortgage rates significantly. There are many types of mortgages and a recession can influence a non-conventional mortgage more than a conventional mortgage. One type of non-conventional mortgage is an Adjustable Rate Mortgage (ARM). The mortgage interest rate is calculated, based on an ARM index. This index fluctuates based on the current financial environment. During a recession the ARM can go as high as the capped rate that has be set. Consequently, the monthly mortgage payments can escalate with an ARM during a recession.

Investors realize that there are no sure bets in the financial market. However, with patience, careful analysis of stock trends, and developing a sound strategy to diversify their portfolio, investors should be able to hold on to their financial gains during a recession.