Assets like stocks often tumble in a recession, as people stop spending, companies pull back on investing and companies lose jobs. As Kavan Choksi UAE says, the uncertainties associated with recession often lead investors to consider getting out of the game altogether. It is not uncommon to find investors panic-selling during recessions to cut their losses. However, this decision just locks in those losses. Hence, instead of selling off investments under-performing during a recession, people should consider further diversifying their portfolio with assets that tend to hold up during a market downturn.
Kavan Choksi UAE discusses a few recession-proof assets
“Recession-proof” is a term commonly used for defining something that is not strongly impacted by the effects of a recession. Even though this term is generally used for describing jobs, it may even apply to investments in certain companies, industries and sectors that generally prove more resilient during times of economic hardship.
There is a good chance that one’s investment portfolio will take a hit during a recession. People can however mitigate their losses by holding particular assets, like:
- Cash: Cash is one of the most important assets to have in a recession. Having a dedicated emergency fund to fall back on is vital during a financial crisis, especially if a person loses their job. Ideally, an emergency fund must cover at least three to six months’ worth of living expenses, including food, medications, utilities, rent and minimum debt payments. Hence, if one does need to dip into their emergency fund in a recession, they would be able to allow other investments to effectively ride out market lows and capitalize on long-term growth.
- Large-cap stocks: Stocks of well-run, large companies that are highly valued usually perform the best during recessions. Companies selling products that consumers purchase no matter the economic environment, such as diapers and utilities, usually do well in a recession because individuals continue buying them. The types of stocks one should focus on would be food, personal care products, health care and utilities. After all, no matter the situation of the economy, people would brush their teeth, eat, go to the doctor and heat their homes.
- Gold: The value of gold has sometimes increased during times of recession, historically speaking. For instance, in 1973 and 1974, the stock market fell 17.37% and 29.72%, respectively, however in the same years, the price of gold increased 73.49% and 67.04%. Similar trends were also seen in 2002 and 2008. While such a trend is not universal, it has held true in many stock market downturns over the years. Hence, it would be a good idea to invest in gold during times of economic turmoil.
As Kavan Choksi UAE says, it can be pretty tempting to overhaul one’s investment strategy or entirely move out of the stock market, if one does feel like a recession is imminent. However, doing so can essentially translate to significant losses. Hence, it is vital to maintain a long-term perspective. Instead of being scared to participate in a weak or declining market resulting from a recession, people should view lower prices as opportunities to buy assets at prices they may never see again.
