In a downturn, what should you avoid?
During a recession, how do people make a living?
Three weeks ago, Fool writer David Stevenson predicted that the United Kingdom will enter a recession.
Since then, we’ve had Northern Rock, swaying stock markets, and more bleak economic news.
Even if the recession isn’t considerably closer, as the optimists claim, the risk of a slump hasn’t gone away.
I wrote about strategies to recession-proof your money in early September, based on my experiences living and working during three recessions (1980-82, 1990-91, and 2001-2002). What is the basic message? Reduce your spending, get out of debt, do all you can to increase your income, and put money aside for an emergency.
I’m going to look at methods to profit from the current economic downturn today.
You’re undoubtedly helping to buffer your finances in the event of a loss of income by living a little more frugally and building up savings, but you’re also building up a cushion of cash that can help you take advantage of the deals that an economic downturn brings your way.
In other words, when people or businesses are desperate to sell and buyers are few, you’ll be the one who has cash on hand and can drive a hard deal.
As the pool of consumers shrinks, vendors of discretionary goods such as new automobiles, kitchens, and bathrooms are among the first to drop prices and offer 0% financing.
If you’re in the market for a new car or kitchen and are willing to wait, you could save a lot of money.
Even better, if you’re willing to be flexible in terms of styles, colors, or designs, you can save even more money as manufacturers try to get rid of hard-to-move inventory.
Back in 1990, I didn’t particularly want a blue Ford Escort, but the price was incredible, and we’re still driving it seventeen years later!
2. Stocks
Shares become cheaper during a recession, some because they’re in sectors that have been particularly hard hit by the slump, and others because there are more sellers than buyers.
If you’re willing to take the long view, you can purchase up holdings in strong, reliable companies at enticing price-earnings ratios.
Expect the Fools on our value shares discussion board to be among the first to recognize potential investing opportunities if the downturn occurs.
If individual company shares aren’t appealing, index trackers can be just as appealing.
I was putting every spare pound I could at my FTSE All Share tracker in early 2003, as the previous stockmarket collapse bottomed out.
Earlier this summer, I was sitting on an almost 100% profit and that’s before dividends.
3. Real estate
Property is seized in a full-fledged recession, sellers trying to sell take practically any offer they can receive, and prices collapse.
It took a long time for a friend of mine who bought an apartment during the 1990/91 recession at the wrong moment to get out of negative equity.
While I only sometimes check the Fool’s Property Markets & Trends discussion board (we’ve lived in our current home for over two decades and have no intentions to relocate), it’s evident that more than one Fool has gained from buying property on the cheap.
Our local market town, like most other areas in the UK, has seen a recent housing price boom, but I recall when the local paper’s property pages were full of repossessions, marketed for a quick sale at extremely attractive prices.
4. Trades with a high level of expertise
People put off plans to rebuild or extend their homes in the same way as sales of new automobiles, kitchens, and other similar items dry up during a recession.
Builders and allied crafts like carpenters and plumbers are in short supply, and building materials prices are falling as well.
In summary, if you have the cash and need some construction work done, a recession can be a great opportunity to get a decent deal.
It’s not ‘taking advantage’; it’s providing job to individuals who are grateful to have it at a time when there may not be much available.
These words are being penned in my attic office: we hadn’t planned to finish the job so quickly all those years ago, but the price on offer was simply too excellent to pass up.
(The builder is now a family friend, and his wife is a fool!)
Hello, Sue!)
5. Tourism and travel
Airlines, hotels, and other travel-related enterprises all have two things in common: they charge whatever the market will bear, and they have a lot of capacity in big, ungainly lumps.
You can’t cut a plane in half because fewer people want to sit on it, and you can’t take a hotel floor out because fewer people want to stay there.
What you can do – and what the owners of such businesses do – is lower prices in order to get whatever revenue they can to assist offset the fixed costs they confront.
In summary, if you have the means, a recession is an excellent time to take a long-haul vacation or any otherwise difficult-to-afford trip.
Even better, you don’t necessarily have to hand up cash.
We’re avid Air Miles and frequent flier program savers, and have previously taken advantage of market downturns to visit San Francisco, Toronto, and Boston, all thanks to fantastic redemption deals.
Are products less expensive during a recession?
Lower aggregate demand during a recession means that businesses reduce production and sell fewer units. Wages account for the majority of most businesses’ costs, accounting for over 70% of total expenses.
During a recession, who benefits?
Question from the audience: Identify and explain economic variables that may be positively affected by the economic slowdown.
A recession is a time in which the economy grows at a negative rate. It’s a time of rising unemployment, lower salaries, and increased government debt. It usually results in financial costs.
- Companies that provide low-cost entertainment. Bookmakers and publicans are thought to do well during a recession because individuals want to ‘drink their sorrows away’ with little bets and becoming intoxicated. (However, research suggest that life expectancy increases during recessions, contradicting this old wives tale.) Demand for online-streaming and online entertainment is projected to increase during the 2020 Coronavirus recession.
- Companies that are suffering with bankruptcies and income loss. Pawnbrokers and companies that sell pay day loans, for example people in need of money turn to loan sharks.
- Companies that sell substandard goods. (items whose demand increases as income decreases) e.g. value goods, second-hand retailers, etc. Some businesses, such as supermarkets, will be unaffected by the recession. People will reduce their spending on luxuries, but not on food.
- Longer-term efficiency gains Some economists suggest that a recession can help the economy become more productive in the long run. A recession is a shock, and inefficient businesses may go out of business, but it also allows for the emergence of new businesses. It’s what Joseph Schumpeter dubbed “creative destruction” the idea that when some enterprises fail, new inventive businesses can emerge and develop.
- It’s worth noting that in a downturn, solid, efficient businesses can be put out of business due to cash difficulties and a temporary decline in revenue. It is not true that all businesses that close down are inefficient. Furthermore, the loss of enterprises entails the loss of experience and knowledge.
- Falling asset values can make purchasing a home more affordable. For first-time purchasers, this is a good option. It has the potential to aid in the reduction of wealth disparities.
- It is possible that one’s life expectancy will increase. According to studies from the Great Depression, life expectancy increased in areas where unemployment increased. This may seem counterintuitive, but the idea is that unemployed people will spend less money on alcohol and drugs, resulting in improved health. They may do fewer car trips and hence have a lower risk of being involved in fatal car accidents. NPR
The rate of inflation tends to reduce during a recession. Because unemployment rises, wage inflation is moderated. Firms also respond to decreased demand by lowering prices.
Those on fixed incomes or who have cash savings may profit from the decrease in inflation. It may also aid in the reduction of long-term inflationary pressures. For example, the 1980/81 recession helped to bring inflation down from 1970s highs.
After the Lawson boom and double-digit inflation, the 1991 Recession struck.
Efficiency increase?
It has been suggested that a recession encourages businesses to become more efficient or go out of business. A recession might hasten the ‘creative destruction’ process. Where inefficient businesses fail, efficient businesses thrive.
Covid Recession 2020
The Covid-19 epidemic was to blame for the terrible recession of 2020. Some industries were particularly heavily damaged by the recession (leisure, travel, tourism, bingo halls). However, several businesses benefited greatly from the Covid-recession. We shifted to online delivery when consumers stopped going to the high street and shopping malls. Online behemoths like Amazon saw a big boost in sales. For example, Amazon’s market capitalisation increased by $570 billion in the first seven months of 2020, owing to strong sales growth (Forbes).
Profitability hasn’t kept pace with Amazon’s surge in sales. Because necessities like toilet paper have a low profit margin, profit growth has been restrained. Amazon has taken the uncommon step of reducing demand at times. They also experienced additional costs as a result of Covid, such as paying for overtime and dealing with Covid outbreaks in their warehouses. However, due to increased demand for online streaming, Amazon saw fast development in its cloud computing networks. These are the more profitable areas of the business.
Apple, Google, and Facebook all had significant revenue and profit growth during an era when companies with a strong online presence benefited.
The current recession is unique in that there are more huge winners and losers than ever before. It all depends on how the virus’s dynamics effect the firm as well as aggregate demand.
Is cash helpful in a downturn?
In today’s economy, where stock market circumstances are unpredictably volatile, knowledgeable investors are looking for more reliable assets to avoid losing money. While our economy appears to be improving, recent events have had a significant impact on the stock market. History has demonstrated the importance of having assets that can withstand a downturn. When it came to how to protect wealth amid a slump, the Great Depression was one of the finest teachers the world has ever seen.
Gold And Cash
During a market meltdown or downturn, gold and cash are two of the most crucial items to have on hand. Gold’s value has typically remained stable or only increased during depressions. If the market is falling and you want to protect your investment portfolio, it’s in your best interests to invest in and safely store gold or cash in a secure private vault.
As a general rule, your emergency fund should be at least three months’ worth of living expenditures.
While banks may appear to be a secure place to store money, safety deposit boxes are neither insured nor legally accountable if something goes stolen.
Furthermore, the Federal Deposit Insurance Corporation (FDIC) will not always be able to cover your money in banks.
Investing in physical assets such as gold, silver, coins, and other hard assets is preferable.
Real Estate
During a slump, real estate is also a smart strategy to secure wealth. Another investment possibility that often retains its value and appreciates is debt-free real estate ownership. Of course, the location is a big consideration. Near colleges is an area of interest for wise investors because these locations tend to weather depressions better. However, the long-term viability of this wealth-protection strategy is contingent on the soundness of the local economy.
Domestic Bonds, Treasury Bills, & Notes
During a depression, mutual funds and equities are considered high-risk investments. Treasury bonds, banknotes, and notes, on the other hand, are more secure assets. The United States government issues these things. When they mature, they pay the buyer a fixed rate of interest.
You can choose short-term bills that mature in as little as a few days depending on your demands.
If you’re searching for a longer-term investment, there are notes available that mature in as little as two years.
Foreign Bonds
Many experts in the past would have suggested foreign bonds as a depression-resistant investment option. Recent events have demonstrated that this is not always a safe bet. Pandemics and other market instability around the world have rendered this a risky investment, as all countries’ economies are affected.
In a downturn, where should I place my money?
Federal bond funds, municipal bond funds, taxable corporate funds, money market funds, dividend funds, utilities mutual funds, large-cap funds, and hedge funds are among the options to examine.
Is it beneficial to have cash during a downturn?
- You have a sizable emergency fund. Always try to save enough money to cover three to six months’ worth of living expenditures, with the latter end of that range being preferable. If you happen to be there and have any spare cash, feel free to invest it. If not, make sure to set aside money for an emergency fund first.
- You intend to leave your portfolio alone for at least seven years. It’s not for the faint of heart to invest during a downturn. You might think you’re getting a good deal when you buy, only to see your portfolio value drop a few days later. Taking a long-term strategy to investing is the greatest way to avoid losses and come out ahead during a recession. Allow at least seven years for your money to grow.
- You’re not going to monitor your portfolio on a regular basis. When the economy is terrible and the stock market is volatile, you may feel compelled to check your brokerage account every day to see how your portfolio is doing. But you can’t do that if you’re planning to invest during a recession. The more you monitor your investments, the more likely you are to become concerned. When you’re panicked, you’re more likely to make hasty decisions, such as dumping underperforming investments, which forces you to lock in losses.
Investing during a recession can be a terrific idea but only if you’re in a solid enough financial situation and have the correct attitude and approach. You should never put your short-term financial security at risk for the sake of long-term prosperity. It’s important to remember that if you’re in a financial bind, there’s no guilt in passing up opportunities. Instead, concentrate on paying your bills and maintaining your physical and mental well-being. You can always increase your investments later in life, if your career is more stable, your earnings are consistent, and your mind is at ease in general.
Is it a smart time to buy a car during a recession?
- Purchasing a vehicle ahead of a possible recession may not seem like a good idea, but if you have the financial means, now is a fantastic time to do it.
- The current economic scenario differs from the Great Recession of the early 2000s, which resulted in the drying up of lines of credit for potential buyers.
- Dealerships may not be available to the public, but they are nevertheless open for business, prepared to deal with potential buyers over the phone and online.
How long do economic downturns last?
A recession is a long-term economic downturn that affects a large number of people. A depression is a longer-term, more severe slump. Since 1854, there have been 33 recessions. 1 Recessions have lasted an average of 11 months since 1945.