Are high-risk investments where you really want to park your money during a recession? Find out what alternatives you have and how well these investment vehicles can safeguard your money.
As Prime Minister Lee Hsien Loong warns of a looming recession within the next two years, he urges Singaporeans to be prepared for more economic challenges. With inflation still high and central banks tightening their policies, it’s now more important than ever that we all safeguard our money.
As the economy continues on a decline, increasing unemployment, and a reduction in real income, choosing where to park your money can help to hedge against the effects of inflation in the long term. . Though there’s no such thing as “recession-proof” investments, you can choose to invest in stable and low-risk investments to minimise the chances of losses. You may also be looking to invest with the aim of generating a passive income to supplement your main income, so now is a good time to start.
Don’t know where to start? Here are some guides that you can refer to in preparation for a recession:
Not sure where to park your money? We can help you out with that.
Sectors that are doing well in a recession
A recession means that there is a significant decline in economic activity. While that means that most of the industries will be badly hit, it does not mean that there are no sectors that are benefitting from the recession.
For instance, the COVID-19 outbreak has ushered in a boom time for healthcare and consumer staples.
The healthcare sector, including biotech and pharmaceutical companies, will always be in demand regardless of the economic situation.
Likewise, for consumer staples. Though a recession will cause consumers to dial back on purchasing consumer goods, basic necessities like toilet paper, groceries, and personal care items will always be in demand. While stable, these stocks are not particularly attractive during boom periods, but during recessions and bear markets these stocks become highly popular due to demand surge.
Here are some sectors that are doing well:
- Consumer staples
- Communication services
- Information technology
- Real estate
Investing in individual stocks is considered relatively risky even at the best of times, what’s more during a recession. If you do want to invest, consider mutual funds as they are less volatile. You can invest in several companies and avoid being too concentrated on a specific company or industry.
Funds like ETFs and index funds allow you to invest in a basket of securities instead of individual stocks, allowing for a diversified portfolio. Think about it this way: even if the value of tech stocks in your basket goes down, there will be other stocks that would be doing well as a result to offset the losses of the underperformer. The stocks can balance out one another and the losses for a specific stock would not impact the entire portfolio much.
To build a stream of passive income for your retirement, consider dividend stocks that provide dividend payouts after a specific period of time. When you buy dividend stocks, you are buying shares of a company that splits a fraction of its profits with all its shareholders. The higher the number of shares you own, the higher the dividends you receive.
If you choose to invest in healthy companies with sustainable business models, you can enjoy a steady passive income which can be extremely helpful during recessions. You may be tempted to buy companies that promise high rates of dividends, but that is when you should be wary and research these companies.
A company could be providing high dividends but yet have negative cash flow as they are borrowing more money than they make. They may be using borrowed money to pay their dividends to shareholders, but this won’t be sustainable in the long run with such high debt. This is why researching before you invest in a company is extremely important, so you can rest assured knowing that the companies you pick have healthy balance sheets.
Related to this topic:
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Another alternative is bonds which are fixed-income instruments. They are essentially I.O.U.s between you, the lender, and the borrower, which typically includes government bodies or private companies.
How bonds work is that you’ll deposit a minimum capital to start and hold out for the entire tenure. Once the bond matures, you’ll get back your capital as well as a small interest on your capital. Because the returns are not exceptionally high when you compare them to stocks or cryptocurrency, bonds are usually low-risk.
For example, Singapore Savings Bonds (SSBs) are great if security ranks high in your books. After the 10-year tenure, you can rest assured your money is right there waiting for you. . SSBs are backed by the Singapore Government which holds the highest ‘AAA” credit rating from international credit rating agencies, meaning that the chances of them not returning the debt is very unlikely.
Since bonds work similarly to dividends, you can buy bonds as passive income as well.
It is common for companies to do badly during a recession, but it is those companies that are still able to maintain low debt and high profitability that you can have confidence in.
Look out for companies that show indicators of strong performance like low debt, high profitability, strong balance sheets and positive cash flow. These indicators show that the companies are able to still perform well during an economic downturn, giving you the confidence that they have a healthy and sustainable business model.
One way you can filter out such companies is to make use of a free stock scanner that you can easily find online. They can provide you with a list of data and analysis on the company you’re eyeing.
Alternatively, researching a company’s vision and leadership can also show you a lot about how the company deals with financial crises. For example, if a company is able to execute its long-term goals and vision, they are most likely effective and sustainable in growing its wealth. They will most likely be able to hold out and survive during recessions and market dips.
Sometimes, the projected gains of a company come secondary while analysing business models and the company’s leadership style can separate the high-quality companies from the rest.
After doing your research, you may be keen to start investing. The next step is to compare the brokerage platforms and decide which one best suits your investment style and choices.
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