As businesses begin to lose money and booming, raging profits give way to something a little more on par with their daily expenses the door to successfully investing in the market swings wide open and invites you in. The principles of investing in the stock market during a recession are remarkably similar to the principles of investing in real estate. When you invest in the stock market during a recession you have the opportunity to take advantage of a companys poor fortune.
How? When companies are making money hand over fist the value of the company goes through the roof, and as the value of the company rises so too does the value of its stock. So when a company is riding high the price of the stock is going to be high as well. Shift the situation a bit, however, and the story changes.
Take mortgage giant Fannie Mae. In the month of July 2008 alone the value of its stock fell from 16 and change to a little over 8 a share. By September of that same year the share price was under a dollar courtesy of the sheer quantity of its borrowers that had defaulted on their loans.
Fannie Mae is only one of many companies who suffered a similar fate during the last recession. Its situations like these that present stock holders willing to think in the long term with a golden opportunity to make a profit. If they can purchase the shares when they are low, as in Fannie Maes case, less than 1/16 their value, they can sit back, fold their hands and wait for the recession to end. When the recession has ended they can sell their shares for a tidy profit, sit back and pat themselves on the back for a job well done.
That doesnt mean you should go out, find a company thats failing and throw your life savings into their stock. Thats a recipe for disaster that many investors have fallen into over the years! This is a golden opportunity that definitely shouldnt be allowed to pass you by, but there are a few things you should watch out for.
1)First and foremost, when youre choosing a company to invest in its essential that you choose one thats going to weather the storm of the recession and bounce back when the time comes. If you sink your savings into a company and it goes under as a result of the recession youre going to be no better off than you were before. To determine whether or not a company will survive to see a bright new future rather than being culled out when the recession separates the wheat from the chaff, answer the following questions:
How long have they been in business? Companies that have been in business for many years are unlikely to go under because of a simple recession-in fact, theyve likely weathered many of them in their time. A company thats already proven their staying power is an excellent choice of investment, and should definitely be given first consideration.
What do they do? Although companies that specialize tend to be movers and shakers when the economy is normal, if they are unable to expand and macro themselves (a topic well talk about in greater detail in just a bit) to adjust to the changing economy theyre going to go under. If a company has not been able to expand and diversify, and if it doesnt offer a product that people are guaranteed to need day after day and therefore are pretty much guaranteed to keep coming back for, its at a high risk for going under during the recession and should be given a wide berth.
Is their industry stable? Historically, there are certain industries that tend to fare better in a recession than others, and these should be given firm consideration when youre expanding your portfolio. Utility stocks (telephone, electric, gas), food and escapes such as cigarettes, alcohol and gambling have a history of tremendous success when it comes to riding out a recession because these are the industries that most consumers deem necessities and will continue pumping their money into.
Is it a necessity? The industries listed above are stable choices during a recession because they are deemed to be necessities; however, if there is one industry that you can be sure is not going to go anywhere in the face of any kind of recession, it is the healthcare and pharmaceutical industry. Regardless of what the economy looks like, people are going to get sick and theyre going to need their medication to recover. This is a strong, stable choice for your portfolio, and its one that you can count on to bring in a steady, if not always remarkable, return.
What about gold? Gold isnt going anywhere. If youre looking for a safe, solid and low risk investment during a recession period, gold is an excellent choice. There is very little chance that the value of gold is going to depreciate rapidly, and its definitely not going anywhere.
Successful investing isnt always just a matter of knowing what to invest in. Many times, its also a matter of knowing what not to invest in. There are certain industries that often bring about good returns when the stock market is high, but who are extremely risky during times of recession. Can you guess which industries those are? Right. Any industry that specializes in luxury services is going to take a hit when conscientious investors start counting their pennies, and as a result so are their stockholders. Good industries to avoid include airlines, luxury resorts, restaurants (unless they have been around for a while) and, of course, financial and lending institutions (who are likely to go under as their borrowers slip further and further into debt).
If you arent familiar with the process of investing the best thing you could do for yourself to ensure the continued growth and success of your investments is find a skilled financial counselor and/or investment broker to work with. Ideally, theyll be able to look at a companys past history and their current place on the market and let you know whether or not they are a good choice for investment. Choose your broker with care, however; the last thing you want is to see your hard work and cautious planning fall apart because your broker was overly ambitious and pushed you into an investment that was doomed to failure from the very beginning.
2)Diversify. Regardless of how established a company is, theres no way to positively predict how they are going to react in the event of a recession. Your mother always told you not to put all of your eggs in a single basket, and she was absolutely right. If you can spread your investments around a bit through several companies in a variety of industries you will stand a better chance of being able to profit from this recession. Even if the bottom falls out of one and it goes under as a result of the poor economy you will have the others to fall back on and ensure that you are never left holding absolutely nothing at the end of the day.
Like real estate, investing in stocks now opens the door to the possibility of tremendous profits down the road. You may not be able to enjoy the same 100,000 gain you would have had you chosen to invest in houses rather than stocks, but you will enjoy a comfortable profit that will help carry you through on into the new economy.
Picture this. Lets say that you decided to take advantage of Fannie Maes current position and bout 4,000 shares of stock. (For the record, this is not something I recommend; Fannie Mae is simply a hypothetical example for the purpose of this book). At a dollar each, youd be able to acquire the stocks for under 4,000.
Not a bad days work, all in all. You set the stocks aside and forget about them as the recession draws to a close. Somehow Fannie Mae has managed to weather the recession, and because of it your stocks rise in value back to their original price of 16 apiece. That means that the stocks you purchased during the recession, the ones that you paid less then a dollar for, are now worth sixteen times their original value. That means that instead of the 4,000 worth of stock you thought you had, youre now sitting on 64,000 worth of stock.
Thats a 60,000 gain. 60,000, a years worth of salary for part of Americas citizens (two years worth for many) to get you started in your new life, all because you had the good sense to invest in the stock market when the selling price was low and the stocks were being agreeable. You saw the opportunity and you took it, and now youre going to reap the rewards.