Whether you’re a business owner or concerned about your personal finances, you’ve likely been tuned in to current news about the economic status of the country. There’s been a lot of talk about recessions and at-risk investments in the past few months. Whether we’re in one, about to enter one, or far away from one, your best bet to prepare for another economic downturn is to acquire information.
The state of the economy affects the job market, businesses, and your investments. Of course, you can’t control many of these aspects. However, you can make informed decisions about where you choose to invest your hard-earned money. So, where should you keep your money when the dark clouds begin to hover over the investment world? Let’s take a look at four of the best choices.
Many people think the stock market is the last place you’d want to put your money during a downturn. However, not all stocks are the same. A stock is an investment that represents a unit of ownership in a company, and shareholders earn returns on their investments by selling, capital gains, or sharing in the success of a company’s dividends.
Defensive stocks differ from other options in that they offer consistent dividends. They generally refer to the stocks of companies in industries where demand doesn’t depend on economic prosperity. For these companies, people simply have to consume their products or services, even if the amount and nature of what they buy may change. After all, we all need to power our homes, buy groceries, and go to the doctor when we’re sick.
Examples of Defensive Stocks
This category would cover industries like utilities, consumer staples like food and household goods, and healthcare. Well-established companies, such as Procter & Gamble and Coca-Cola, are examples of defensive stocks. Defensive stocks may not soar quite as high during booms, but they have a strong floor during busts, partially because of their cash flow.
Defensive company stocks can help keep your portfolio growing through dividends as well, which tend to be a common feature of the sector. You can use this dividend track record, as well as overall earnings stability, to help identify these companies as you invest.
It’s worth adding this type of stock to your portfolio, but it’s important to remember that the low volatility of this option can lead to smaller profits during bull markets. It’s also unwise to buy and sell these at a rapid pace to keep up with market changes. These perform best with patience. Warren Buffett is famous for never losing money, and a large portion of his wealth was built while holding defensive stocks.
High Quality Bonds
People often mention stocks and bonds in the same breath. However, they differ in some noteworthy ways. If you purchase a stock, you’re essentially buying partial ownership in a corporation. While bonds, on the other hand, are a loan from you to a company, state, or sovereign government. Because a bond is a loan, you can think of it as an IOU between the lender and borrower. And if you choose to invest this way, you make money as the borrower makes payments.
Those looking for another more hands-off investment that can thrive during a downturn can always turn to unexciting but reliable returns of investment-grade bonds. Bonds backed by high-quality companies or stable governments essentially guarantee owners a modest prescribed return over a set period, a rarity in the investment world. The reliability of bonds is one of their biggest advantages. However, it doesn’t hurt that if an investor holds a bond until it reaches maturity, they get all of their principal back.
The Importance of Timing
Bonds can also be sold to make larger profits if you can time the market correctly. Buying bonds before or at the start of a recession can make investors money. This can happen as demand shifts from the roller coaster of the stock market to the relative safety of fixed income. Investors can sell bonds at a price higher than their initial purchase price.
For all their benefits, it’s critical to remember that a bond is only as good as the company, government, or revenue stream that backs it. Companies can default on your bonds, and bond yields can fall. If the company behind your purchased bond goes under, you may lose your investment. You might be forced to settle for pennies on the dollar.
Focus solely on investment-grade products, as opposed to high-yield or “junk” bonds. The latter offer higher potential returns but also a higher risk of default — a not-so-desirable mix during a downturn. Yes, there are downsides. However, they’re still a safer bet than some other investment options.
Those who experienced the housing-sparked financial crisis of the late 2000s might find it surprising to see this one on the list. Still, similar to defensive stocks like utilities, people will always require a place to live. Real estate offers many different strategies, two of which are particularly worthwhile to consider here.
Rental properties come with the responsibility of upkeeping livable conditions for tenants. However, they also come with the unique advantage of providing someone with a home and securing consistent income. They are a unique investment that can be more personal if you choose to do so. You could become a friendly neighborhood landlord, or you could hire a property manager to oversee day-to-day operations.
There’s a lot of flexibility with this investment because you can see returns by just having one property or by having multiple. Something to consider to help keep track of all your investment properties is an SREO (schedule of real estate owned). This is a list of all the rental properties that an investor has full or partial ownership of.
Owning a rental property offers numerous advantages during downturns, even if the overall price of the property remains flat or falls. Similar to defensive stock investments, rental properties are often best when they’re long-term investments. A properly purchased and managed rental will pay you money each month, ensuring an income for you or your portfolio. This extra cash is especially valuable during recessionary periods when you might need it yourself or want to take advantage of buying opportunities.
Rental properties also offer tax advantages. For example, the ability to deduct costs related to operating and maintaining them. These deductions, along with on-paper expenses like depreciation, can help reduce the taxes you owe on your primary income. Property is also one of the few investments that you can pass on to future generations if you choose to do so. There’s only so much land and real estate available. Consequently, it’s almost always a smart investment to buy some.
Flipping houses or other properties can be an excellent investment for times when the economy seems unsettled. These periods may lead more homeowners to sell their homes or existing ones to accept less than they would have otherwise. Both situations are perfect for flippers, who can then secure the property they need at a reasonable price.
After making some updates to the home’s systems and aesthetics, flippers can then sell it for a premium to would-be owners looking for a turnkey property. The profits made from property flipping can be substantial; some individuals even use it to prepare for retirement. Many of the costs to flip a property come from updating appliances and modernizing certain features. Avoid foundational issues, plumbing problems, and electrical or termite damage because it will have a higher cost to fix.
Unfortunately, real estate can require quite a bit of capital, at least to get started. If you can’t scrape together the five to six figures needed to pull off a flip in cash, you can always explore options like fix and flip loans. These unique loans are often short-term and interest-only, allowing flippers to invest relatively little money, knowing they’ll pay off the loan when the property sells. Naturally, these should be used with caution to ensure you don’t get stuck with a loan for a house that won’t sell.
Gold and silver are a lot more than pretty materials for jewelry — they’re also a good choice for preserving and growing your capital. There’s a reason why so many families value their precious heirlooms. Investors often see them as a way to preserve and pass wealth to future generations. Precious metals have long been used as a store of value, essentially dating back to the dawn of human currency.
For thousands of years, people all over the world have valued natural, precious elements like precious metals and gemstones. No currency has ever outlasted precious metals. Research shows gold has retained a similar buying power for centuries. The same weight of gold and silver almost always buys an equivalent unit of oil, housing, and food. This shows that humanity has always placed value in it.
Precious metals also have a unique value. Investors value them as a currency as well as a commodity. People know it’s valuable, but they also prize its beauty. Even better, some metals such as silver have also found increased use in the manufacturing process of our many high-tech devices. This provides additional demand. The preservation of purchasing power unique to precious metals showcases how it’s a worthy investment. This is especially evident when you contrast it with the performance of other currencies issued by governments.
Securing Precious Metals Investments
In addition, precious metals offer a variety of ways of investing, from buying ETFs that track the price of the metal to physically taking possession of bullion to store under your own security. While the cost of the metal will remain close to the same, the ease of transaction, the safety of your investment, and other factors will help determine how you should invest.
Investing in precious metals has several advantages when it comes to building wealth, and it shares the trait of low supply with real estate. There is only so much gold and silver on Earth, and people can’t really make anymore. If you’re able to secure some, it may be worth the investment. In September 2022, the price of a single ounce of gold was $1,700. Imagine if you just found that in a river of gold in California. You’d really be striking it rich.
High Yield Savings Accounts
While they’re not technically considered an investment, savings accounts offer a modest return on your money. A high-yield savings account earns rates that are better than the national average, typically around 1.50% annual percentage yield. By comparison, the national savings average is 0.13% APY.
If you invest $10,000, your money will grow without any need for direction from you or an account manager. With an APY at 1.50%, you would earn a bit more than $150 at the end of your first year. It may not make you rich, but the earnings are much better than a standard savings account that would return $10 for the same amount invested.
It can be worth stowing away some of your funding in this type of account. This is true even if you choose to do so just for safekeeping. A savings account is completely safe in the sense that you’ll never lose money. This is rare to say for any other investment or account. Most high-yield savings accounts are government-insured up to $250,000 per account. Even if the institution fails — if the downturn is that drastic, but let’s hope not — you’ll be compensated.
You will be able to find the highest-yielding options by searching online and comparing options. Just like gold and land, cash is always a relatively safe bet. While inflation can erode its purchasing power, cash doesn’t usually lose much of its value.
Make Sure Your Investments Are Ready For The Next Downturn
While trading crypto or venture capital can be exciting and rewarding, some investments are risky, and they become riskier during times of economic trouble. We all have different investment goals, styles, and timelines. But we all face the same recessions and economic downturns.
It can be smart and in your best interest to explore safer investment options. Look for opportunities that offer consistent returns and reliability. Whether you prefer to flip houses or buy bullion, own stocks or bonds, preparing yourself is the most critical thing. Keep this list in mind, and you’ll be sure to know where your money should head next.
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