FINANCIAL PLANNING AMIDST RECESSION
There is no well suited strategy that can help you cope up with the difficult times, some might work for few, others might not. However, there are some well recognized patterns being analysed by investors that can help reduce the extent of loss during such situations. These times are considered to be difficult with greater volatility, however are capable of bringing in better opportunities.
During a recession, investors need to act cautiously but remain vigilant while monitoring the market activities and landscape. During this phase, it is considered a better alternative to invest in companies with less debt, strong balance sheets and good cash flows as they are considered to do well in such tough times than companies or assets which are highly leveraged and speculative. These categories can be riskier for investors with a greater risk of bankruptcy.
Some counter - cyclical stocks can perform better during a recession with significant price appreciation. A counter-cyclical stock refers to the shares of a company that belongs to an industry or niche with financial performance that is typically negatively correlated to the overall state of the economy. Investors can even look into investing in companies being more recession - resistant than the others such as utilities, consumer staples, and discount retailers.
Knowing which assets to not invest in is as important as knowing the companies which make good investments.
The more leveraged a company is, the more vulnerable it can be to tightening credit conditions when a recession hits.
Cyclical stocks tied to employment and consumer confidence move in the same direction as the underlying economy and hence are at risk when the economy downturns and hence making them a less attractive alternative for investment during recession.
Speculative assets are usually the worst performers during recession, as they are based on optimism of investors, who usually take out money through such investments and rush towards safer investment options. Speculative asset prices are often fueled by the market bubbles that form during an economic boom and go bust when the bubbles pop.
While it might be tempting to ride out a recession with no exposure to stocks, investors may find themselves missing out on significant opportunities if they do so. Opting some strategic techniques and stocks that perform well during a crisis, might help them realize profits.
During recession, Investors should look for companies with strong balance sheets and stable business models. Some examples of these types of companies include utilities, basic consumer goods conglomerates, and defense stocks.
This can be determined by studying companies financial reports. These stocks can manage tight credit conditions and perform well even during economic downfall.
Investing into recession - resistant companies and counter-cyclical stocks can provide significant opportunities as counter cyclical stocks move in the opposite direction of the economy and perform well during recession, leading to appreciation in their value.
These out performers generally include companies in the following industries: consumer staples, grocery stores, discount stores, firearm and ammunition makers, alcohol manufacturers, cosmetics, and funeral services.
When the economy moves from recession to recovery with low interest rates and rising growth, speculative, cyclical and high leveraged stocks that survive the recession become the best performers.
Diversification is especially important during a recession when particular companies and industries can get hammered. Diversifying across asset classes—such as fixed income and commodities, in addition to equities—can also act as a check on portfolio losses.
Market fluctuations create value opportunities. Buying during recessions (and holding for very long periods of time) is one of the ways Warren Buffet has become so wealthy!