The Covid-19 related recession of 2020 lasted for about two months. This made it the shortest recession on record. As Kavan Choksi points out, much like any recession; it also impacted the lives of many. Hence, it is important for people to understand the ways to take advantage of recession, in order to maintain financial security for the long term.
Kavan Choksi talks about how people can take advantage of a recession
One of the most important aspects of a recession is that it is always followed by a recovery, which includes a strong rebound in the stock market. However, this does not mean that the investors should sit idle as their portfolios get pummeled by massive selling. There are certain investment strategies that one can follow to take advantage of the recessionary forces to position a portfolio for a swift and strong rebound. These strategies include:
- Use the dollar-cost average when share prices decline: Not everyone can predict when a recession may hit. However, most people are likely to see a sell-off in the stock market way before a recession. When this happens, one must remember that the stock market shall typically begin to bottom well before the end of the recession. Hence, in this situation, investors may take advantage of a declining market through the dollar-cost averaging method of investing. Anyone making monthly contributions to a qualified retirement plan would already be making use of this technique. However, as the market starts to plunge, it would be a good idea to increase the contributions.
- Buy into dividends: Anyone with plans to hold stocks during a recessionary period must always go for shares that are owned by established, large-cap companies with good cash flows and strong balance sheets. These companies would be better situated to weather economic downturns in comparison to smaller businesses that have poor cash flows, but are also more likely to pay dividends. Dividends serve very few purposes for investors. In case a company has a long history of increasing and paying dividends, then there is a high chance that they are financially sound enough to survive most economic downtowns. Secondly, dividends provide a return cushion to investors. This basically means that even as the share prices go down, one would still receive a return on their investment. It is due to this reason that dividend stocks usually outperform non-dividend stocks during market downturns.
- Invest in consumer staples: Consumers need to buy food, medical supplies, hygiene products, and other basics even during recessions. These consumer staples are generally the very last items to be cut from the family budget. Therefore, while companies selling high-end electronics and other discretionary products experience drops in revenue, businesses that sell food products and other basic necessities do not. Owing to this reason, companies in the consumer staples sector are at times called defensive stocks, as they generally stay resilient even when the economy falters.
As Kavan Choksi mentions, recessions can bring about financial instability for individuals and families. Following the strategies discussed above can help people to take control of their financial situation and lowers the potential impact of economic downturns.