Investing in a recession

When a recession hits, it is time to put away some extra cash into a reserve fund. During a recession, the risk of layoffs increase and without a little savings, you could end up losing your car or worse, your house. A reserve fund needs to be equal to six months worth of living expenses and it needs to be kept in a savings account, where you can have easy access to it if you need it. There are several questions to consider when investing during a recession. You must ask yourself if the economy will turn around in the near future, or will it turn around in a few years. The large companies that are the backbone of the country should still have a bright outlook for the future. Companies like Chevrolet, McDonalds, and Coca-Cola are the backbone of the economy and if they begin to fall, then it is defiantly not a good time to invest.

Large declines in the stock market are usually a temporary problem and will be fixed within a few days, months, or years. Recessions are actually a great time to invest because the stock shares are considerably lower than usual. For example, during a recession stock shares for large companies may be $20 compared to the usual average of $70. A recession is the perfect time to buy shares because they eventually will increase. The time to sell stock was right before the recession hit, not during the recession. If you can survive a short decline in your investments for a few months, you will be able to cash in on those stocks once it rises again.

During a recession, financial planners recommend investing your money in bond funds. Investing money in bond funds versus in the U.S. Treasury will ensure the interest rate remains relatively the same. Bond interest rates are about 1.5 percentage points higher than the U.S. Treasury and the returns only increase with long-term investments. The reason several people opt out of investing in bonds during a recession is because bonds typically have a higher risk margin compared to the U.S. Treasury.

For investors with large amounts of money, the best investments are junk-bond funds. Junk bond investors typically cash in about one year after the market bottoms out. For example, the last big recession was in 1991 and the junk-bond market produced a 34.6% return on investments for investors. The year before the large return, investors lost about 4.3% on their investments. The returns during a recession are actually higher than people expect for the junk-bond market. When interest rates lower, bond prices lower and investors are able to benefit from that.

Crude oil is another investment to consider during a recession. Currently, crude oil prices are down about $90 a barrel. In July, crude oil prices were a whopping $150 a barrel and predictions of $200 were threatening investors. Falling oil prices actually present a good opportunity for the smart investor. The way to look at crude oil is like a large tax cut for the economy, when the oil is down, mergers are up and interest rates are down. It is only a matter of time under the stock market prices will increase and investors in crude oil will cash-in, especially during the summer when crude oil prices almost double. While companies may claim they will use less oil during the recession, they still have to find a way to have their products delivered to them, hence why crude oil is a good investment during a recession. The large risk with crude oil investing during a recession is the risk of unemployment and housing prices.

Safe investments during a recession include wheat, corn, soybean, cattle, and other livestock. Since people need to eat, the food industry actually makes money during a recession. With the overwhelming amounts of poverty in the world, food investments are a safe bet because they will be used to feed those individuals. Considering there are more than one billion people around the world that are expected to come out of poverty in the next 10 years, food and livestock are a worthwhile investment.

Gold is always a sound investment. While you may not see huge returns on gold initially, it is a sound investment that produces positive returns over time. The price of gold depends upon two factors: supply and demand and hoarding and disposal. There is a large amount of hoarded gold compared to annual production so the price of gold is actually affected by changes in sentiment versus annual production. There has always been debate over gold investments since some believe it is not worth as much as other stocks. The question about gold investments was posed in 2005 about whether or not gold is worth the price of Google. In 2005, Google and gold were both worth about $700. In January 2008, gold outpaced Google by 30% and was worth $859 versus Google at $657. Recession fears swept over the country in 2008 and more investors began buying shares of gold instead of Google and it was worth over $1000. As of September 2008, Google is worth about $450 while gold is worth about $862.

Business Week states there are 5 key steps you must follow when investing during a recession, they are as follows:

1. Don't get rattled by the uncertainty.
2. If you trade stocks, be careful how you do it.
3. Diversify, and go international.
4. Defensive moves might help you relax, but they'll probably hurt your returns.
5. Make sure you have enough cash.

Using these steps and remembering that the stock market is constant changing will help investors with their money. Long term investing is the best way to get through a recession since the market will eventually return and will gradually increase as the economy strengthens. It is actually a great idea to invest more money into the market during a recession since the stocks are much lower than normal.

Portfolio managers often have opposing views when it comes to investing during a recession. Some investment strategists recommend you go for a conservative approach while others will recommend watching for good buys and investing more money because strong gains will hit at the tail end of a recession. The country has gone through recessions before and it has always managed a way to come back. During a recession, the amount of layoffs increased and foreclosures increase. Since people are being laid off, they cannot afford to spend as much money, causing companies to lose money, therefore leading to a recession. It is important to remember that the stock market will always take a hit during a recession, but if you can "wait out the storm" you will be able to bounce back.

The early `80s saw a recession that lasted for over a year. The stocks bottomed out and then eventually rose 35 percent. The early `90s saw the same pattern for about 6 months before the stocks rose 28 percent. 2008 is seeing a similar pattern with the recession, while stocks are reaching their lowest levels in years. The best advice investment strategist can give is to remind their clients to go on the offensive approach and pick up foreign stocks, and growth companies. Healthcare, industry, and technology are great stocks to invest in during a recession as they will emerge in the future with new leadership that will help them grow again.

Financial experts can attempt to predict the end of a recession, but it is generally hard for them to do this since it varies on the economy. While some financial experts are predicting the end of the recession with the election of a new president, others are more conservative in thinking it will end by the year 2010. The economic stimulus and 4th quarter tax breaks are causing several financial experts to become hopeful about the stock market. Investors need to think about the stocks in a year or in 5 years versus a few weeks or months. If you like to go with a more stable approach to investing, you need to stick with large-cap stocks, international stocks, and safe earnings. Companies without a stable earning are not stocks you want to invest in during a recession.

Energy companies are a safe investment during a recession because the long-term demands for energy are not going to fall away. While gasoline may never reach a low cost like $40 for a barrel, it will bounce back to higher levels during the travel season which is the month of December and the summer. Large corporations like Exxon Mobil are sound investments during a recession because they are typically "recession-proof". Companies that have exposure to oil and natural gas are also great investments during a recession because the stock has some flexibility to strengthen due to natural gas assets.

Companies that handle bankruptcy issues and credit problems are also great investments during a recession since people are being laid off. Bankruptcy companies will not only see an increase in their stock during a recession, but they will also see a boom at the end of the recession.