What to Buy Before a Recession

No, we’re not talking about snapping up a new TV before things get hairy. But being smart about your money and investments is more important than ever.

Written by Elaine King CFP® / June 23, 2022

Quick Bites

  • Sticking to diversified investments is a good plan no matter how the stock market is doing.
  • Utility and healthcare companies may be more reliable since their services are in constant need.
  • If you have your own business, it may be a good time to invest in it so you can maintain growth and increase your customer base.
  • Don’t forget other types of investments that might put you on track for making more money, like taking a class.

According to the National Bureau of Economic Research (NBER) there have been more than 32 recessions since the mid 1850s, lasting on average 10 months (except for the one in 2020 that lasted only two months). On the other hand, expansion periods last almost five years (except for the one that started in 1991, which was over 10 years).

So, you may be wondering, how can my finances take advantage of the next recession?

There are several things you can do, kind of like preparing when you know a storm is coming. First take inventory of what you have, especially in your investment portfolio. Then project things you may need in the event the storm takes longer than expected. And finally buy shares in the most important company there is in your world.

Take inventory of what you have and ensure you are diversified

Most Certified Financial Planners are trained on the rule that a diversified portfolio is best for weathering all kinds of storms—by putting your money in all sectors you beat the hard landing.

Your investment portfolio should have some fixed income in the form of bonds and most of the equity in the form of index funds or individual shares of large companies in a sector you favor. Beyond those two large sectors, you should have exposure to companies of different sizes (large, medium, small) and by different locations (international, emerging markets, developed marketing, etc).

Elaine King

Meet the Expert

Elaine King, CFP®, has served as the Family’s Financial Planner for over 1,200 families and 100 multigenerational family enterprises crafting actionable family financial plans. Elaine is a Financial Education advocate, creator of the first family financial program in LATAM and winner of the Best Latin book award. She was recognized in 2020 in the list of Investopedia ‘s Top Influential Advisor and in 2017 recognized by People Magazine’s Top 25 Influential Hispanic Women.

In fixed income, invest in government bonds and corporate bonds to get started. During downturns, it is important to stay diversified to lower the risk of loss. But know that your portfolio can change in value.

If it goes down 20% or more, it’s what we consider a bear market. During this time, it is crucial to stay the course, most downturns are followed by a high increase and missing that will be detrimental to the overall long-term return of your portfolio.

And don’t forget: It’s a good idea to also keep some cash in an interest-bearing savings account, so you have it on hand if you need it.

Buy protective and consider undervalued assets

It is normal that during bear markets your portfolio may be out of balance from the targeted allocation you have set for your investments. You may want to sell some losers (i.e., tax loss harvesting), claim some gains (especially if they are in a tax deferred retirement account) or move more savings to your investment portfolio.

Keep in mind that the S&P 500 bear markets have been followed by wonderful recoveries, the most impressive one being in March 2000. After a decrease of 49%, the index returned 56%— you will not want to miss this.

However, you can also buy companies that belong to the following industries: utilities, healthcare, I Bonds and undervalued companies. The last one is typical of Warren Buffett’s philosophy; for example, he bought HP when it was under 9 times its price over earnings.

During recessions there will be companies that significantly lower their earnings but have strong balance sheets and potential—those are worth adding to your portfolio.

Utilities and healthcare are sectors that produce services we all must use rain or shine, don’t require extra inventory to produce and thus will be okay during economic downturn.

Invest based on your own personal projections

The best advice I have is that historically, the return of having a business, part-time or full-time has outperformed the market long-term. And this is because here you have full control of your results and projections.

For example, if you are an interior designer, make sure that before the recession you have the most updated technology to differentiate yourself from the rest. If you sell products, ensure you have the added customer service value, and for services, always give your clients a little extra attention to ensure retention.

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During recessionary times when the economy slows down and unemployment rises, think of what will benefit you the most in your own finances. Will it be to start the business that everyone will use during an economic downturn, strengthen your customer loyalty program, obtain the certification you require to get the next promotion in your job or identify the career that will be in high demand in the near future?

Having cash and a good network in these times will allow you to take advantage of the storm and invest in future growth for your portfolio and overall financial net worth.

About the Author

Elaine King

Elaine King CFP®

Elaine has served as the Family’s Financial Planner for over 1,200 families and 100 multigenerational family enterprises crafting actionable family financial plans.

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