Recession Investing: A Beginner’s Guide to Profitable Investing During a Recession

As of February 2022, inflation was at 7.9%. One month later, the Fed decided to raise interest rates by 0.25%, the first of six increases this year. You might ask why interest rates are rising. In essence, it's a strategy used to control the rise of inflation.

Let's say you want to take out a loan to start a business project. With interest rates rising, it will cost you more to take out a loan by paying more in interest payments. Thus, you might decide to save your money until interest rates decline.

This will have two positive impacts: you will earn more from your savings account and help reduce the supply circulation which will lower inflation as a consequence.

What Is a Recession?

A recession is identified when there is a decline, lasting more than two quarters, in the following five economic sectors: employment, manufacturing, income, retail sales, and gross domestic product. Simply put, it is a slowdown in economic growth that is usually caused by a rise in inflation.

During recessions, the stock market usually takes a steep dive and can lose up to 40% of its value, if not more. If you are a long-term investor, you can take advantage of recessions by investing in undervalued assets.

This tends to be profitable since you are betting that the economy will continue to grow over the next couple of years and you are not looking for instant growth.

If you are a long-term investor, looking to invest your money for a minimum of five years, recession investing could be great for your portfolio. We will summarize five ways to invest your money for growth during a recession.

1. Dividend Stocks

Dividend investing is one of my favorite ways to buy stocks because of the passive income you get from it. Dividend-paying stocks are companies that pay you a portion of their profits for holding their stock.

These are usually well-established companies that would rather pay a portion of their profits to investors than spend them on research and development.

I recommend sticking with dividend aristocrats companies. These are companies that have paid and increased their dividends for at least 25 consecutive years. Given the history of the dividend, you can judge that the company is in good standing and will continue to pay its investors regardless of economic decline or recession.

You can start buying stocks with apps like M1 Finance, Robinhood, and Charles Schwab.

2. Real Estate

It is possible that home values decline during a recession. But even if they continue to rise, real estate is always recommended by experts as it is a long-term investment and prices will increase in the long term.

While the economy recovers from a recession, a good strategy is to buy a real estate property and rent it out for a fixed monthly income. That way, you are making passive income and could always sell the property a couple of years later for a profit.

3. REITs

A REIT stands for a real estate investment fund. Simply put, it is a mutual fund for real estate investing for those who do not want the headaches of owning and managing a property.

My favorite advantages of owning a REIT are the high dividend yield and the fact that the profits are distributed to the investors on a monthly basis, just as if you were to collect rent from your tenant.

Many investors choose to go this route as it is easier to buy and sell a REIT compared to the traditional way of buying and selling a home.

4. Commodities

Commodities are an investment class that is either a raw resource or an agricultural product. Examples of commodities include gold, silver, oil, etc. Usually, demand for these kinds of commodities increases as inflation rises and the economy enters a recession.

You can invest in commodities by either buying the actual resource or investing in a mutual fund or ETF. These funds are essentially a basket of securities that track an underlying asset.

You can get started buying ETFs with apps like M1 Finance, Robinhood, and Charles Schwab.

5. Cryptocurrency

I believe that Bitcoin is one of the assets that will stay stable during a recession. Bitcoin is a decentralized asset that is essentially considered to be "digital gold."

Experts consider Bitcoin to be a robust defensive asset, much like gold. Regardless, Bitcoin is yet to encounter a recession, so it is premature to say that it can survive one. But it is still a good way to diversify your portfolio and expose yourself to some life-changing returns.

Start buying bitcoin on Coinbase and Gemini.

The Bottom Line

Warren Buffet, one of the greatest investors of all time, said, "Be fearful when others are greedy. Be greedy when others are fearful. "

There will be a lot of fear if prices start to plummet. But if you are a long-term investor, a recession shouldn't worry you. Just be sure to not let your emotions take control and cause you to sell when prices start to plummet.

The truth is that no one can time the beginning or end of a recession. But the best strategy is to continue investing while prices remain low.

Dollar-cost averaging into long-term diversified positions will pay off when the economy starts to recover. Buying good dividend stocks, real estate, and commodities like gold are good ways to come out on top when the recession is over.