When a recession hits, you want to try to focus on making the right investment decisions. The market is always forward-looking. As a result, you need to be on your toes. Prices will have likely decreased a lot once it’s evident the economy is firmly in a recession. Because of this, City of London investments that feel relatively safe may not be attractive moving forward.
While bonds do tend to be much safer than stocks, not every time is a good time to put your money into bonds. You need to be aware of interest rates when you are looking to invest in bonds. An increase in interest rates will push bonds to decrease. Whereas, a decrease in interest rates will increase bond prices. Any bond that has a longer-dated maturity will end up experiencing more effects of these interest rate fluctuations.
As an investor looks to anticipate a recession, they are likely going to feel like moving their money out of riskier assets and into the “safer” ones like bonds. They are generally looking for the FED to decrease interest rates which can prop bond prices up. Because of this, when you are entering a recession, it could be a good idea to consider buying bonds before the rates have fallen.
However, one of the absolute worst times to invest in bonds is when the interest rates are expected to rise soon. This is something that occurs during and after a recession. Any investor may feel like they are moving their money toward a safer asset in bonds, but as the economy starts to return to growth, the interest rates will continue to climb and the underlying prices of the bonds will decrease. Likewise, although interest rates rise, property prices will fall, so it could be a good time to consider property finance and investing.
2. Companies In A Lot Of Debt
Any company that has a lot of debt is to be avoided. These are the companies that will fall a lot before, during, and even shortly after a recession. A lot of investors will anticipate the increased risk of these companies due to their balance sheets and the stock price will tumble due to the last of interest in it at certain prices. If the company then experiences a decrease in sales which is very typical during periods of economic instability, they are more likely to not be able to pay it. Eventually, they could default because of it.
Because of this, a company with a lot of debt on its balance sheet is a risk. However, if the company can effectively survive a recession, it can deliver a very substantial return. That is only if the market is pricing the impending death of the company and it ends up surviving. However, it’s always possible the company doesn’t make it out and it could leave you (the investor) bag-holding as a result. It’s a very high-risk option during a recession.
3. Higher Risk Assets Like Options
There are a lot of high-risk assets like options that are not recommended during recessions. Options are bets that a stock price is going to either rise or decrease by a certain time. They are incredibly high-risk assets. However, with high-risk, comes high reward potential. The problem is, a recession can bring about wild volatility and fluctuations that make them incredibly difficult to succeed with.
With options, you have to accurately predict the stock price, but you also have to predict when it will reach a specific price. If you are wrong on either, you could end up losing your entire investment or be forced you buy underlying stock in amounts that you don’t have.