Should You Start Investing During A Recession?
Markets are weak, unemployment is rising and investor confidence is at an all-time low. It is an economic slowdown that could inevitably lead to a recession.
So why are we talking about investing in a time like this?
In other words, weakening markets is not a bad thing. It could contain potential benefits for those who are willing to wait their time.
However, there are a few important questions you need to ask yourself before you start investing now.
Can you afford it?
Before you even begin to consider the recession as an investment opportunity, it is important for you to determine if you can save the financial resources. While this could potentially lead to long-term gains, significant risks remain.
In other words, you need to make sure that your finances are able to bear any potential loss. Be sure that:
- Have at least six months of emergency savings
- Have an income that can cover your monthly expenses and commitments
- May commit these funds to investments for more than five years
What are the market conditions?
A recession is defined by two quarters of negative GDP growth. The good news is that Malaysia is not yet in recession. There was positive economic growth before the start of the pandemic-induced movement order, and we anticipate some sort of recovery by the end of the year.
However, the past three months of economic uncertainty have taken their toll on the stock markets. So even if we are not in a recession yet, it looks like we are looming – which is all that has to happen to drive down stock prices.
At the time of this writing, the KLSE Composite Index is at its lowest level in five years – after recovering from a massive fall in January 2020. It has also shown a downward trend since the middle of 2018.
In fact, Forbes believed that the United States is 4.5 years behind for a recession in 2018. As history has shown, when the United States of America experiences economic problems, everything the world too.
As such, it doesn’t look good for the global economy in the short term.
So why invest now?
The economic cycle goes through four stages: expansion, peak, contraction and trough.
Expansion is when the economy grows and employment increases. The peak is when everything takes place at a level of economic production at its maximum and there is a significant upward pressure on prices. This leads to a contraction as the market corrects with reduced production and increased unemployment. Finally, the trough is the lowest possible level of contraction and the economy begins the cycle again.
What goes down tends to go up. At least as far as the economy as a whole is concerned. Your mileage may vary for individual investments.
Investors who can afford it watch economic downturns and market declines as stocks go up; seize the opportunity to make long-term investments.
This is the reasoning behind the popular quote from Warren Buffet, “Be fearful when others are greedy and greedy when others are afraid”. A gourmet market drives up prices and signals that the economy is reaching its peak. On the other hand, fearful investors are a sign of falling stock prices.
Knowing that the economy is recovering, then it may be a good idea for the brave investor to buy into industries that can survive the recession and eventually come out of the turmoil in the expanding part of the cycle.
It’s for you?
Making an investment during a recession is not for the faint of heart, especially if you’re the type to obsessively check your portfolio. There is no way to know when an economic contraction will end. There is also no way to know if you are in the trough.
It will not do your blood pressure any good to see your investments decrease in the short term while you wait for the recession.
These economic cycles span over ten years. Malaysia experienced financial slowdowns in 1997, 2008, and our current slowdown started in 2019. With this cycle, we can expect that all you do now is prepare for the next peak in the economic cycle.
It is also important to note that overall, the next dip is not as low as the previous cycle. You will always be in mind as long as you focus on the very long term. So get ready to do your homework on the industries that will recover the quickest and get ready to sit on the investment for several decades.
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