Cliffwater2 produced one of the more fascinating papers on this topic, which looked into PE investment programs at U.S. state pension systems over a 16-year period ending June 30, 2016. (encompassing two bear markets and two bull markets). PE outperformed public stocks by 440 basis points annually on average across the 21 pension schemes evaluated throughout this time period (Exhibit 1). During weak markets, these significant relative returns were much more obvious than during years of economic expansion. 3 When the economy was stronger, private equity outperformed by 290 basis points on average; however, when the economy was poorer, this climbed to 660 basis points.
Private equity outperforms during economic downturns, according to an examination of median net IRRs of US buyout funds across vintages (Exhibit 2). In fact, we discovered that the asset class produced some of its best returns during recessionary years, such as 2001, 2002, and 2009.
The capacity of private equity to withstand downturns is further supported by data from Hamilton Lane and J.P. Morgan.
4 Between 1980 and 2014, J.P. Morgan looked at the Russell 3000 Index (which covers around 98 percent of the investable U.S. equities market). During recessions, they discovered that two-fifths of publicly traded equities have experienced “catastrophic loss,” defined as a decline of 70% or more from their peak values. However, only about three out of every 100 private equity funds have faced a comparable setback (Exhibit 3). Stocks are 13 times riskier than private equity funds when viewed in this light. When comparing index performance over time, PE’s lower volatility is clearly noticeable when compared to public markets (Exhibit 4).
Is private equity profitable during a downturn?
However, we are now in the eleventh year of the longest bull market in history, and as fears of a future downturn grow, it’s natural for investors to wonder how private equity will fare in a downturn. Private equity’s outperformance actually increases during difficult circumstances, according to historical statistics.
Cliffwater2 produced one of the more fascinating papers on this topic, which looked into PE investment programs at U.S. state pension systems over a 16-year period ending June 30, 2016. (encompassing two bear markets and two bull markets). PE outperformed public stocks by 440 basis points annually on average across the 21 pension schemes evaluated throughout this time period (Exhibit 1).
During weak markets, these significant relative returns were much more obvious than during years of economic expansion.
3 When the economy was stronger, private equity outperformed by 290 basis points on average; however, when the economy was poorer, this climbed to 660 basis points. Private equity outperforms during economic downturns, according to an examination of median net IRRs of US buyout funds across vintages (Exhibit 2). In fact, we discovered that the asset class produced some of its best returns during recessionary years, such as 2001, 2002, and 2009.
Private equity funds may be less risky than stocks
Given this study, investors considering portfolio construction ahead of the next downturn may choose to include a private equity allocation, not only for its potential outperformance, but also for its lower volatility.
We’ll look at why PE has outperformed throughout downturns in our next blog. Download our white paper, Private Equity Offers Resilience in a Downturn, for more information on this topic.
What investments perform well during a downturn?
During a recession, you might be tempted to sell all of your investments, but experts advise against doing so. When the rest of the economy is fragile, there are usually a few sectors that continue to grow and provide investors with consistent returns.
Consider investing in the healthcare, utilities, and consumer goods sectors if you wish to protect yourself in part with equities during a recession. Regardless of the health of the economy, people will continue to spend money on medical care, household items, electricity, and food. As a result, during busts, these stocks tend to fare well (and underperform during booms).
What happens to stocks during a downturn?
Stock prices usually plunge during a recession. The stock market may be extremely volatile, with share prices swinging dramatically. Investors respond rapidly to any hint of good or negative news, and the flight to safety can force some investors to withdraw their funds entirely from the stock market.
During a recession, what happens to assets?
When the economy is in a slump, assets that are highly leveraged (with a lot of debt), cyclical, and speculative are the ones that suffer the most. Investing in these companies can be dangerous because there’s always the possibility that they’ll go bankrupt. During a recession, they are the most vulnerable.
Invest only in companies with low debt, consistent cash flow, and strong balance sheets. Counter-cyclical stocks do well in downturns and appreciate regardless of the economy.
Tip #1: Gold is Good (so is Silver)
During a recession, gold and silver are both ideal investments to have because their value is not affected by the stock market. Prices usually rise when the market is down, because these commodities do well when the market is down. While gold and silver will not lose value during a recession, purchasing a large quantity may be difficult if prices are high.
Tip #2: Invest in Real Estate During a Recession
During a recession, house values in some markets fall, mortgage interest rates are often low, and rental demand is steady but with little competition from other investors/buyers.
Real estate, like gold and silver, is a physical asset. Buying at a low point in the market to take advantage of reduced prices and interest rates can also be a wise investment during a downturn. If you own one or more homes, they may have depreciated in value. But, unlike the stock market, that doesn’t imply you won’t ever get your money back. Even during a recession, real estate markets and values will rise as the economy recovers, making it one of the best long-term investments.
During the COVID-19 pandemic, Section 8 landlords are likely to be less concerned about their rental units. This is due to the fact that they own low-income homes. The federal government will subsidize whatever amount of a Section 8 tenant’s rent they are unable to pay. As a result, Section 8 property owners do not need to be concerned about their mortgage being paid. During a downturn, this is still another excellent investment.
Tip #3: Keep the Recession Proof Stocks You Have
Have you ever heard the term “fear of missing out” (FOMO)? Fear Of Missing Out is an abbreviation for “fear of missing out.” Why not use the acronym FOLM? Most likely not, because I made it up. When the economy tankes, people’s fear of losing money skyrockets, and properly so.
However, selling all of your investments during a recession is the worst moment to do it. If you take a near-sighted approach to the stock market, you’ll virtually surely lose money. When it comes to the stock market, and consequently the economy, one thing we can bet on is that it will vary.
“What goes up must come down,” Newton’s third law of motion reads, and vice versa. The market is the same way. A market that is growing is always followed by a downturn. Those that invest in historically strong stocks or buy when the market is low always come out on top.
During a recession, I don’t recommend holding all of your stocks. Keep the excellent ones, get rid of the rest, put your money elsewhere, and don’t let FOLM keep you up at night.
Tip #4: Buy Recession Proof Stocks
Stocks have risen in value through time, averaging 7% every year in the past. This includes dividends and is inflation-adjusted. Investing in equities during a recession allows investors to more than double their money. It appears to be a no-brainer, right? That’s right, it is! However, in order to get these returns, investors must hold the stock for at least 20 years.
So, why are so many people fearful or unwilling to invest in the stock market during a downturn? It has a lot to do with having a short-term attitude. For example, I’ve already lost money and will continue to lose money, so I’m selling my stocks and exiting while I still can.
During a recession, people lose out when they allow their emotions to take over and they go into survival mode. Instead of adopting a long-term investing approach and sticking to it regardless of market volatility. TAKE IT FOR A RIDE
There are also mutual funds and index funds that are more recession-proof than others, particularly currently. Just make sure they’re top quality equities during a recession.
Tip #5: Earn Money During a Recession with Dividend Stocks
As interest rates fall, there are fewer possibilities for investors hoping to earn income as the stock market falls. Dividend stocks, on the other hand, have generally performed well during recessions. The major risk you face with this stock is a dividend decrease. You can mitigate this risk by investing in stocks that generate positive, consistent cash flow and have minimal debt levels.
Tip #6: Lower Your Risk with U.S Treasury Bonds
Treasury Bonds, Bills, and Notes are fully backed by the US government and are popular during economic downturns due to their safety. You can invest in the US dollar by purchasing treasuries and avoid being affected by stock market fluctuations. Mortgage loans can be included in federally backed bonds (FHA). During a recession, this is another solid defensive and low-risk investment.
Tip #7: Keep the Lights On! Buy Utilities
Utility stock investing is almost risk-free. Utilities, as we mentioned in the industry section, are unlikely to generate big profits. However, they have the advantage of being defensive. Electricity will always be in demand, especially now that we rely on the Internet and technology to keep our businesses up and operating from afar. With utilities, slow and steady wins the race, making it a perfect investment to buy during a downturn.
Tip #8: Honor Your EldersInvest in Health Care / Senior Living
The results of the 2020 Census have yet to be revealed, but Baby Boomers are expected to be the second-largest population in the United States (second only to their progeny, Millennials). What is the significance of this? The need for health care and caregiver services will skyrocket as a large portion of the population, roughly 73 million people, enter or are well into their older years. Senior living and health care services will only continue to expand and grow, making now an excellent moment to recognize and invest in your elders.
Tip #9: Hit Your 401k Contribution Limit
Should you maintain putting money into your 401(k) account during a downturn or put it towards something else? Don’t quit contributing, is the quick answer. According to financial analyst Charlotte Geletka of Silver Penny Financial, “the best time to invest in your 401k is when the stock market is down.” When equities are down, it’s a good idea to consider increasing your contribution amount because your money will go further. It’s a long-term investment plan that pays off in a downturn.
Tip #10: Protect Your Portfolio / Diversify
Before a recession comes, in an ideal world, you’d have a well-diversified investment portfolio. Hopefully, you’ve already entered that environment and are ready to face the next recession with as little stress as possible. If you don’t live in that world and are concerned about any of your assets, there are some steps you may do to lessen your risk. To reduce your risk and keep your money secure, look for defensive, recession-resistant assets (like the ones listed above).
Tip #11: Be Cash HeavyFor Now…
Cash not only gives you flexibility, but it also gives you piece of mind. Cash is almost risk-free in a bear market. While money in a money market or savings account won’t yield much interest, it’s a good short-term answer for being defensive during a downturn.
Keep in mind that this is not a medium- to long-term approach. You’ll want to reinvest that money whenever the economy improves. The longer your money sits in a low-interest savings account, the less purchasing power it has.
How do private equity businesses fare during a downturn?
The rationale for this is simple: a downturn creates an opportunity for private equity firms. They may plan and invest for the long haul, allowing them to deploy capital at more favorable terms and make bold, reasoned decisions without being hampered by the short-termism that plagues so many public companies.
Before the market crashes, where should I deposit my money?
The best way to protect yourself from a market meltdown is to invest in a varied portfolio of stocks, bonds, and other asset classes. You may reduce the impact of assets falling in value by spreading your money across a number of asset classes, company sizes, and regions. This also increases your chances of holding assets that rise in value. When the stock market falls, other assets usually rise to compensate for the losses.
Bet on Basics: Consumer cyclicals and essentials
Consumer cyclicals occur when the economy begins to weaken and consumers continue to buy critical products and services. They still go to the doctor, pay their bills, and shop for groceries and toiletries at the supermarket. While some industries may suffer along with the rest of the market, their losses are usually less severe. Furthermore, many of these companies pay out high dividends, which can help offset a drop in stock prices.
Boost Your Wealth’s Stability: Cash and Equivalents
When the market corrects, cash reigns supreme. You won’t lose value as the market falls as long as inflation stays low and you’ll be able to take advantage of deals before they rebound. Just keep in mind that interest rates are near all-time lows, and inflation depreciates cash, so you don’t want to keep your money in cash for too long. To earn the best interest rates, consider investing in a money market fund or a high-yield savings account.
Go for Safety: Government Bonds
Investing in US Treasury notes yields high returns on low-risk investments. The federal government has never missed a payment, despite coming close in the past. As investors get concerned about other segments of the market, Treasuries give stability. Consider placing some of your money into Treasury Inflation-Protected Securities now that inflation is at generational highs and interest rates are approaching all-time lows. After a year, they provide significant returns and liquidity. Don’t forget about Series I Savings Bonds.
Go for Gold, or Other Precious Metals
Gold is seen as a store of value, and demand for the precious metal rises during times of uncertainty. Other precious metals have similar properties and may be more appealing. Physical precious metals can be purchased and held by investors, but storage and insurance costs may apply. Precious metal funds and ETFs, options, futures, and mining corporations are among the other investing choices.
Lock in Guaranteed Returns
The issuers of annuities and bank certificates of deposit (CDs) guarantee their returns. Fixed-rate, variable-rate, and equity-indexed annuities are only some of the options. CDs pay a fixed rate of interest for a set period of time, usually between 30 days and five years. When the CD expires, you have the option of taking the money out without penalty or reinvesting it at current rates. If you need to access your money, both annuities and CDs are liquid, although you will usually be charged a fee if you withdraw before the maturity date.
Invest in Real Estate
Even when the stock market is in freefall, real estate provides a tangible asset that can generate positive returns. Property owners might profit by flipping homes or purchasing properties to rent out. Consider real estate investment trusts, real estate funds, tax liens, or mortgage notes if you don’t want the obligation of owning a specific property.
Convert Traditional IRAs to Roth IRAs
In a market fall, the cost of converting traditional IRA funds to Roth IRA funds, which is a taxable event, is drastically lowered. In other words, if you’ve been putting off a conversion because of the upfront taxes you’ll have to pay, a market crash or bear market could make it much less expensive.
Roll the Dice: Profit off the Downturn
A put option allows investors to bet against a company’s or index’s future performance. It allows the owner of an option contract the ability to sell at a certain price at any time prior to a specified date. Put options are a terrific way to protect against market falls, but they do come with some risk, as do all investments.
Use the Tax Code Tactically
When making modifications to your portfolio to shield yourself from a market crash, it’s important to understand how those changes will affect your taxes. Selling an investment could result in a tax burden so big that it causes more issues than it solves. In a market crash, bear market, or even a downturn, tax-loss harvesting can be a prudent strategy.
What should I buy before the financial crisis?
Having a strong quantity of food storage is one of the best strategies to protect your household from economic volatility. In Venezuela, prices doubled every 19 days on average. It doesn’t take long for a loaf of bread to become unattainable at that pace of inflation. According to a BBC News report,
“Venezuelans are starving. Eight out of ten people polled in the country’s annual living conditions survey (Encovi 2017) stated they were eating less because they didn’t have enough food at home. Six out of ten people claimed they went to bed hungry because they couldn’t afford to eat.”
Shelf Stable Everyday Foods
When you are unable to purchase at the grocery store as you regularly do, having a supply of short-term shelf stable goods that you use every day will help reduce the impact. This is referred to as short-term food storage because, while these items are shelf-stable, they will not last as long as long-term staples. To successfully protect against hunger, you must have both.
Canned foods, boxed mixtures, prepared entrees, cold cereal, ketchup, and other similar things are suitable for short-term food preservation. Depending on the food, packaging, and storage circumstances, these foods will last anywhere from 1 to 7 years. Here’s where you can learn more about putting together a short-term supply of everyday meals.
Food takes up a lot of room, and finding a place to store it all while yet allowing for proper organization and rotation can be difficult. Check out some of our friends’ suggestions here.
Investing in food storage is a fantastic idea. Consider the case of hyperinflation in Venezuela, where goods prices have doubled every 19 days on average. That means that a case of six #10 cans of rolled oats purchased today for $24 would cost $12,582,912 in a year…amazing, huh? Above all, you’d have that case of rolled oats on hand to feed your family when food is scarce or costs are exorbitant.
Basic Non-Food Staples
Stock up on toilet paper, feminine hygiene products, shampoo, soaps, contact solution, and other items that you use on a daily basis. What kinds of non-food goods do you buy on a regular basis? This article on personal sanitation may provide you with some ideas for products to include on your shopping list.
Medication and First Aid Supplies
Do you have a chronic medical condition that requires you to take prescription medication? You might want to discuss your options with your doctor to see if you can come up with a plan to keep a little extra cash on hand. Most insurance policies will renew after 25 days. Use the 5-day buffer to your advantage and refill as soon as you’re eligible to build up a backup supply. Your doctor may also be ready to provide you with samples to aid in the development of your supply.
What over-the-counter drugs do you take on a regular basis? Make a back-up supply of over-the-counter pain pills, allergy drugs, cold and flu cures, or whatever other medications you think your family might need. It’s also a good idea to keep a supply of vitamin supplements on hand.
Prepare to treat minor injuries without the assistance of medical personnel. Maintain a well-stocked first-aid kit with all of the necessary equipment.
Make a point of prioritizing your health. Venezuelans are suffering significantly as a result of a lack of medical treatment. Exercise on a regular basis and eat a healthy diet. Get enough rest, fresh air, and sunlight. Keep up with your medical and dental appointments, as well as the other activities that promote health and resilience.
Do markets always bounce back?
Dips, drops, bumps, and crashes are all part of the ride. Market downturns occur frequently, and one thing they all have in common is that they are virtually always followed by recoveries. Here’s a rundown of market crashes and recoveries throughout history.
Tulips were first introduced to the Netherlands in 1593 and quickly became famous. Tulips became highly sought after in the Netherlands after contracting a virus that caused their petals to turn multicolored, and Dutch people would spend a fortune some would even barter their life savings or land to get their hands on the exotic bulbs. Tulip prices rose as a result, generating an economic bubble that may burst at any time. In 1637, something similar occurred. Tulip prices had risen to the point where no one could afford them, prompting a sell-off. Then a domino effect occurred, and bulbs became worthless, causing people to lose money while selling their tulips.
Tulip growers sought government assistance, but none of their efforts were successful. The storm eventually passed without causing any significant damage to the Dutch economy. But, more crucially, people began to understand the financial consequences of herd mentality.
The world came to a halt for a few minutes on October 29, 1929, when the stock prices on the New York Stock Exchange plummeted. Not only did it signify the end of the ‘roaring twenties,’ an age of economic development and prosperity, but it also signaled the beginning of the Great Depression. So, what happened, you might wonder? The stock markets in the United States grew rapidly during the 1920s, but by summer 1929, the economy had begun to slow. Production was falling, unemployment was rising, salaries were stagnant, and debt was piling up. As a result, the markets began to respond to the new economic reality, and prices began to decrease in September. The sell-off accelerated, with the Dow Jones Industrial Average, a US stock market that tracks the performance of 30 firms, falling 12 percent on October 29th. The downturn continued until 1932, when markets reached their lowest point1.
The worldwide economy was devastated by the 1929 stock market crash. By 1933, unemployment in the United States had reached 25% of the workforce. Not only that, but if you were lucky enough to have a job, your compensation would have dropped dramatically2. Almost everyone in western countries was affected by the Great Depression, and governments had no choice but to intervene. One noteworthy event occurred in the United States, when President Franklin D. Roosevelt announced the New Deal, which included a series of policies aimed at stimulating the economy and creating jobs. The stimulus program was successful in restoring market confidence, and 25 years later, in 1954, the Dow Jones Industrial Average was able to regain its losses3.
Investors around the world watched in terror as stock markets fell on Monday, October 19, 1987, commonly known as Black Monday. On that day, markets all across the world dropped by more than 20%4. The crash occurred as a result of a series of events that caused investors to fear. Because of a strong dollar, the US economy was stagnating, and US exports were suffering. But it was the emergence of computerized trading that actually exacerbated the crisis. The idea of utilizing computer systems to handle large-scale trades was still relatively new at the time, and some systems would automatically sell stocks when a certain loss objective was met, causing values to fall and a domino effect to occur, sending markets into a downward spiral.
Black Monday came and went quickly, but it didn’t linger long, and financial markets in the United States and Europe largely recovered with the support of central banks that slashed interest rates. Five years later, markets were increasing at a rate of around 15% per year4.
Do you recall the 1990s? We were all ecstatic when the Internet became commercialized – and we still are! Suddenly, the sky was the limit, and a slew of new Internet-based businesses (‘dotcoms’) popped up. Needless to say, investors were ecstatic, and the majority of them believed that all online enterprises would become extremely profitable in the future. Yes, they were mistaken! A speculative bubble – when some investments are overvalued resulted from this overconfidence. The bubble began to bust in March of 2000. The Nasdaq, a stock exchange in the United States that lists technology businesses, dropped more than 20% in April after reaching an all-time high. By October 2002, the market had reached its lowest point, down 80% from its March 2000 peak5.
The Dotcom Bubble Burst, like the Tulip Craze, didn’t persist forever, and the Nasdaq eventually rebounded after a few years. Although the Nasdaq was severely harmed when the Dotcom bubble burst in 2001, it recovered by the end of 2002, and the market recouped its losses in 2015.
The impending ‘financial armageddon’ shook the world in 2008. On both sides of the Atlantic, seemingly impregnable banking organizations fell, causing markets to plummet. Take the FTSE 100, for example: in 2008, the UK stock market dropped 31% not a small drop, to be sure6. The meltdown then turned into an economic catastrophe, and countries all over the world entered a long period of recession. The UK GDP (what is generated in the country) fell to -4.2 percent in 2009, and the jobless rate soared to 7.9 percent in 2010, before reaching an all-time high of 8.1 percent in 20118.
Governments acted quickly to try to mitigate the economic impact of the catastrophe and aid market recovery. Central banks lowered interest rates to encourage consumption and investment, and financial laws were tightened to prevent further excesses. For example, in the United Kingdom, the Bank of England is now in charge of monitoring individual banks and building societies, and it conducts vigorous stress tests to assess banks’ ability to deal with severe market conditions without government intervention. With all of these safeguards in place, markets were able to quickly recover. The FTSE 100, for example, regained 22.1 percent the following year after being severely battered in 2008.
We can’t say that markets will always bounce back since we can’t anticipate the future. If you look at how markets have performed in the past, you’ll discover that they have always rebounded. This is how markets work; they have ups and downs, and as an investor, you must learn to deal with them. Market declines can be frustrating, but if you respond by selling your investments, you risk jeopardizing your investment strategy and missing out on some really profitable days. It may be worthwhile to remain with your investments for a number of years if you want to smooth out the bumps while taking advantage of the good periods. The longer you hold your investment, the more likely you are to profit. Between 1986 and 2019, people who invested in the FTSE 100 for any 10-year period had an 89 percent chance of making a profit this includes Black Monday, the Dotcom Bubble, and the Global Financial Crisis of 200810.
Market downturns usually invariably lead to recoveries, although there are a few notable outliers. The length of time it takes for you to heal is also a factor. The Japan bubble is the most well-known example. In New York in 1985, Japan signed the Plaza Accord, agreeing to a devaluation of the US dollar against the Japanese Yen (and the German Deutsche Mark) in order to stimulate US exports. In other words, the value of the dollar decreased in relation to other currencies, allowing you to buy more dollars with the same amount of yen. This agreement had a fantastic impact on Japan’s economy since it made it simpler for Japanese corporations to purchase foreign assets like houses and businesses. The Japanese Imperial Palace was once said to be “worth” as much as the entire state of California11. The richness was reflected in the financial markets’ performance. The Nikkei 225, the main Japanese stock market, achieved an all-time high of approximately 39,000 in December 1989. The bubble, however, did not last and eventually broke. The Nikkei 225 had lost more than $2 trillion by December 199012. After affecting the actual economy, the crash deteriorated, with businesses falling bankrupt and consumer spending declining. The crisis didn’t truly end until 2009, when important economic policy reforms were implemented, allowing markets to recover. However, despite impressive gains, the Nikkei 225 has never fully rebounded to the level achieved in 1989 (yet!).
If anything, the Japanese bubble demonstrates the importance of diversifying your investments across asset classes (e.g., stocks and bonds) and regions to reduce the risk of losing everything this strategy is known as diversification, and it can help protect your portfolio from market fluctuations.
6: http://www.brewin.co.uk/charities/insight-for-charities/ten-years-since-the-financial-crisis/
11: https://amaral.northwestern.edu/blog/how-much-was-the-imperial-palace-worth-in-japanese
12: https://www.japantimes.co.jp/news/2009/01/06/reference/lessons-from-when-the-bubble-burst/#.Xt3y kBFw2x http://www.japantimes.co.jp/news/2009/01/06/reference/lessons-from-when-the-bubble-burst
Please keep in mind that the value of your investments might go up as well as down, and you may receive less than you invested.
What industries are the most recession-proof?
Healthcare, food, consumer staples, and basic transportation are examples of generally inelastic industries that can thrive during economic downturns. During a public health emergency, they may also benefit from being classified as critical industries.