Though the economy continues to hold steady, with Wall Street hitting new records and unemployment remaining low, high inflation and high interest rates have stuck around, lending some concerns to how long this economic prosperity can last. Not to mention the forthcoming 2024 presidential election. A new administration could have all kinds of effects on the economy. While an economic downturn may not be right around the corner, there’s always the chance of one coming.
Should a downturn affect how you invest your money? Experts explain.
“During economic downturns, it can be tempting to sell off your investment and keep cash reserves — but this is rarely a good idea,” said Thomas Kralow, a self-made millionaire and founder of University Grade Trading Education. “Holding cash loses you money as inflation eats away at your savings by the day.”
The smart move is to stay invested, Kralow said.
“Instead of trying to time the market, stick to a long-term investment plan that aligns with your risk tolerance, goals and timeline, and never stop exploring your options,” he said. “If this strategy works for the world’s most successful investment firms, why wouldn’t it work for you?”
Consumer staple stocks are investments in direct-to-consumer companies that sell essential goods such as food, drinks, and household and personal care products.
“The logic here is simple: they are always in demand,” Kralow said. “Even in an economic downturn, people won’t stop buying the essentials, so the companies selling them are far less likely to see revenue fall.
“Additionally, publicly-traded companies that sell consumer staples are often well-known legacy businesses with a long history of success,” he continued. “They have a sizable share of the market, limited competition among companies of their stature and steady prices — which is important during a recession when consumers are most sensitive to price changes.”
Kralow particularly recommends Coca-Cola, L’Oreal and Walmart. “They’re big brands that have been around for decades and have comfortably survived everything the economy has thrown at them so far,” he said.
Gold and silver are typically resilient during market downturns, Kralow said.
“Precious metals are often considered a smart investment, since the decades worth of data we have available shows they tend to hold or increase the value, even in times of economic uncertainty,” he said. “This is largely because they aren’t tied to the financial stability of a particular currency or country, which allows investors to hedge against inflation when times get tough. Plus, precious metals are rare and difficult to mine. We can’t simply turn the printers on and create more like we do with money when supply falls short. Subsequently, as more people buy and hold, scarcity grows and their value tends to increase over time.”
There are a number of ways you can invest in precious metals.
“Buying physical metals in the form of bars or coins is an option, of course, but then you have the issue of storing, insuring and keeping them safe, which comes at a cost,” Kralow said. “Instead, you can buy exchange-traded funds (ETFs), which allow investors to add precious metals to their portfolio without having to physically purchase, store and resell them.
“Mining stocks are another alternative,” he continued. “While some ETFs directly track the price of the underlying metal, mining stocks allow you to invest directly in the companies engaged in the exploration, development and production of precious metals. Then there are mutual funds that allow multiple investors to pool their money together and invest in a variety of precious metals securities, including stocks and ETFs. These funds are typically expert-led and offer access to investment opportunities that are typically unavailable to individuals.”
“Just like consumer staple products there are also staple services that we simply can’t survive without, and healthcare is among the most essential,” Kralow said. “People require medical attention, medicines and services regardless of the state the economy is in.”
This was proven during the COVID-19 pandemic when many stocks saw a boost, he said.
In fact, healthcare stocks tend to do well in recessions and during high inflation. According to BlackRock, these stocks have not only survived the last seven recessionary periods in the U.S. but thrived and shown resilience.
“Backed by the government, bonds provide a steady return that offsets the volatility of equity prices,” Kralow said. “Given the minimal risk, bonds tend to outperform other investment types in a downturn. Not only do they provide a relatively safe investment, but also a steady income stream in the form of regular interest payments. They’re also highly liquid, meaning they can be bought and sold in the market quickly and easily.”
However, there are a few things to be mindful of.
“While government bonds provide a steady income stream, they generally offer lower returns than other types of investments,” Kralow said. “Interest rates paid by government bonds may not keep pace with inflation, especially at the moment, and their value fluctuates based on changes in interest rates. When interest rates rise, the value of existing bonds may decline.”
Crypto is a “high-risk, high-reward investment” that Kralow recommends having as part of your portfolio.
“They’re similar to precious metals in the sense that they’re not controlled by any one government or central authority, which can make them less vulnerable to economic turbulence,” he said. “Likewise, their supply is limited and, as we know, scarcity is an excellent driver of value.”
However, because crypto is volatile, don’t invest everything into this one asset. It’s also important to be strategic about which cryptocurrencies you invest in.
The safest way to invest in such a volatile market is to choose blue chips such as Bitcoin and Ethereum, as low-cap altcoins are at greater risk of financial collapse. We’ve seen the values crypto can reach, so the bear market is the perfect time to buy low. In the long run, when a new growth cycle starts, these investments should provide the largest rewards.”
Investing in yourself will always pay off.
“The knowledge and experience that you have will stay with you for the rest of your life, helping you to thrive no matter the market circumstances,” Kralow said. “Investing in courses, mentorship and networking will help you avoid costly mistakes and open up new opportunities for you. In the long run, this investment will help you to minimize your losses and increase your profits.”
