Stocks vs Mutual Funds vs ETFs: Where to invest during a recession?
Recently, alarms have gone off over the threat of an economic collapse due to a series of bank failures, persistent inflation, climbing interest rates, and considerable stock market fluctuations.
Putting money into investments in times of an economic recession may be intimidating, but it doesn’t have to be worrying if you know what to seek out.
Before investing during a recession, one needs to think about what they want to achieve. Do you want to take the least amount of risk possible in volatile situations? Would you like higher returns on your investment over an extended period? Are you looking to create a steady source of fixed income for yourself? Or perhaps you’re interested in buying stocks while prices are low? Implementing all of these strategies into your portfolio may be ideal, but it’s important to focus on what works best for you. Making wise financial choices could positively impact your future permanently.
Rather than buying individual stocks, even if offered at a discount, one can choose to invest through mutual funds. Stock markets will usually experience an extensive upswing after a recession (several stocks climbing together). Therefore, rather than relying on just a few stocks that may return high amounts, it is best to put money in a diversified fund. This method might not give as high returns as some of the equities in the index table but it will provide you with a secure portfolio.
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During financial downturns, investors tend to turn towards fixed-income investments (like bonds) and dividend paying securities (such as stocks with dividends) because they offer regular income.
Investing in companies that provide dividends can be a good source of steady income, even when market conditions are unfavorable. Dividend stocks are shares of companies that give out a portion of their profits to shareholders according to the number of shares owned. For those interested in this investment strategy, there is also the option of buying dividend ETFs, which are composed of businesses known for offering generous dividends. What makes dividends especially attractive during economic uncertainty is that these payments can be withdrawn as cash and used for income.
When you invest in dividend-paying stocks, mutual funds, or ETFs, you can reap the benefit of reinvesting dividends. By doing so, you reduce the volatility of losses due to market conditions. Say, the stock market drops 10 percent and your dividend yield is 3 percent. If you reinvest those dividends, you will be less affected by the downturn and enjoy the extra advantage of compound interest over time.
Having a diversified portfolio is a great way to lower your risk. In recent years, gold has become a popular refuge in times of volatility as its price skyrocketed. Financial advisors suggest that investors should keep 10 to 15 percent of their investments in the precious metal during periods of high inflation and economic recession. Those with some exposure to gold had a partial guard against the effects of the recent market downturn.
However, investing in physical gold such as bullion or jewelry can be risky due to the costs associated with production and maintenance. To avoid this, consider investing in financial assets like gold sovereign bonds or gold ETFs that enable buyers to purchase small amounts of gold (1 gram and above). Additionally, it is advised that individuals make gold a consistent part of their overall asset allocation, not just an occasional inclusion.
Making investments in foreign equities, particularly US stocks, is an effective way to diversify one’s portfolio. These funds offer two key benefits: by investing in another country whose market differs from the domestic market, this contributes to diversity between multiple countries. Additionally, currency diversity is achieved since these funds are denominated in US dollars even when purchased and redeemed with rupees. The NAV return of the fund is increased as the rupee declines against the dollar over time. For Indian households who plan to spend dollars in the future, US stocks are the best way to hedge against currency risk.
Large cap stocks that are in good health usually remain steady during market downturns.
Putting money into a variety of funds can help reduce the chances of suffering losses during an economic downturn by spreading out investments across several assets.
Holding a blend of bonds and debt funds can provide investors with a steady income, helping to mitigate losses during market downturns.
When a recession wave looms, stable asset classes like real estate and gold bonds can be considered. Those looking to invest during these tough times may want to consider blue-chip stocks as well as sectoral funds or mutual funds that focus on more bullish or stable sectors.
(By Abhinav Angirish, Founder, Investonline.in)
Disclaimer: This is the author’s personal opinion. Readers are advised to consult their financial planner before making any investment.