Let’s try to clear our minds of all of the connotations we have of a recession. We generally associate it with great financial loss and struggle. Though this is certainly the case for millions of people, we can learn to succeed where others fail. Let’s go over several ways to make money during a recession.
This post will primarily focus on using investments to make money in a recession, allowing you to have your money work for you. Let me know if you would be interested in a post covering alternative ways where you trade time for money!
Be Greedy During a Recession
Picture chicken little. “The sky is falling!” is a sentiment pushed by financial experts and everyday people alike when they see the market plummet by 40%. After all, it’s scary to see the DESCRIBE OUTCOMES OF RECESSIONS and the stock market tanking. But as Warren Buffett has said, “Be greedy where others are fearful. And fearful when others are greedy.” This means when the market is falling due to mass fear of the future, we must take advantage and be greedy.
During a recession, people feel that they can take on less risk financially. This is understandable if you are laid off or lose some other form of financial stability. However, if you are privileged enough to continue to have a job and savings, you are no worse off than you were prior to the recession. Shift your viewpoint from fear most people are currently feeling, to excitement to take advantage of the current opportunity.
That opportunity is the fact that people selling shares due to fear causes stock prices to plummet. We can see this with the stock market dropping >20% due to fear around COVID-19. People get scared when they see stock prices falling due to worldwide uncertainty, so they sell their shares, causing stocks to fall even more, on and on. Again, reframe this situation to see it from a point of view of the opportunity. Others are fearful, so let’s be greedy.
SALE! EVERYTHING MUST GO
Imagine you walk into Target and your favorite socks are 30% off. The exact same socks, but on sale. Score! You grab way more pairs than necessary, dreaming of never having to do laundry for socks ever again. Stocks are in the exact same situation.
Instead of stocks, picture a solid company like Apple. The company hasn’t changed: its CEO, design team, product lines, etc. Apple is the same as it has always been. But due to fear surrounding an unrelated worldwide pandemic, Apple’s share price has fallen by 30%. The same as the socks, be greedy. Purchase more shares than you otherwise would if possible, or at the minimum, keep investing steadily. You are purchasing the same portion of the same company for significantly less. Then, once the stock market recovers as it has for over 100 years, makes even larger profits.
Many experts have attributed the fact that most investors fail to most investors’ emotions. It’s scary, maybe even depressing, to see your portfolio drop by 20%. Money you worked so hard for in the first place. But as I’ve talked about before, as long as you don’t sell your stocks, you have not realized your losses. You haven’t lost money yet. Instead, the value of your investments has fallen. If you can ride out the downturn to make massive profits on the rebound, you can then realize your profits if you desire and actually have made money.
Don’t forget that retirement accounts such as 401Ks and Roth IRAs are tax-free investment accounts. The concept of stocks being on sale applies just the same if not more to retirement accounts. If investing during a downturn nets you 5% more profit afterward, that 5% profit is not taxed in a retirement account. If you are able, increasing your retirement contributions during a recession is a fantastic idea.
This can also give you peace of mind for the future. You can sleep better knowing that if a recession does occur later in life when you need those retirement accounts, you worked hard now to grow them as efficiently as possible.
No Knee-Jerk Reactions
A good practice is if you feel that you should sell shares of a company, give yourself a few days to think about it. Run through the reasons you think selling is the right decision to ensure that the move isn’t solely based on emotions. It is okay to include beliefs and your personal point of view when analyzing a company. This qualitative analysis is an important part of the process. Using personal experience to see that a company is likely losing consumers’ interest is fantastic insight. But most of the time, a company doesn’t change overnight. This downturn is usually drawn out over years or decades as the effectiveness of the company is overshadowed by newcomers.
Though these impulsive decisions usually apply to selling stocks due to fear, they can also apply to buying stocks during excitement. It’s exciting to see a sale happen as we talked about above. However, there may be underlying reasons for the drop in price that you aren’t yet aware of. It is best to take a couple of days to research the company a bit to ensure you haven’t missed any vital information. You don’t want to “catch a falling knife”, meaning buying a company on its way down to falling and never recovering. It’s best to make sure that the company has either certainly not changed at all, or that it is beginning to show strength to rebound.
Even during a recession, people need somewhere to live. This means that houses are still being bought and sold, and certainly, people are still paying rent. I could even personally see this when our rent rose by 13% this last year due to inflation. This was a wake-up call that being the renter and having zero stakes in real estate makes me the loser in this scenario and the landlord the victor.
This led me to invest in real estate crowdfunding through Fundrise. Even though I am not directly involved in real estate by owning my own property, this gives me a share of rental properties, the same as owning a share of stock gives you a stake in that company. This way, as rents rise due to inflation, I receive the benefit of increased dividends through Fundrise.
If you are fortunate enough to have enough saved and know where you want to stay for a while, owning neutral real estate, or owning your primary residence, is a fantastic option. Though this takes far more effort than crowdfunded real estate, you also receive the entirety of the profits instead of a portion going to Fundrise or another platform. That way, you get even more benefits from every rise in rent.
Sell Unnecessary Items
It may sound silly, but many of us have a bunch of items sitting around our house that we no longer use. Selling these items on a marketplace can not only free up space but also alleviate any financial stress. In addition, you can use this spare money towards the above investments! Every little bit counts.
I have talked before about dollar cost averaging in the Beginner’s Guide to the Stock Market. For a quick reference, this involves investing a set amount of funds into selected stocks on a consistent schedule. Even when we are entering or already in a recession, continue to keep this consistency going. The reason that dollar cost averaging is such an effective way to invest is that it allows your investments to track the average cost of the stock market over time.
If you stop dollar cost averaging during a recession, you are missing out on the opportunity to lower your average cost of the stocks you are averaging into. In fact, investing during a downturn or recession is the most important time to continue dollar cost averaging. Keep all of those automated investments going. Don’t let the fear of others cause you to fail.
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