A good investor doesn’t associate a struggling economy with dark times but instead weighs up the pros and cons of what clicks amid inflation and recession.
Investments are subject to risk, but investors generally make money when the economy is booming. In contrast, recession time is associated with bitter experiences, when the shrewdest of investors can lose fortunes. It’s a time when many small or medium size companies, who otherwise flourish, are forced to shut up shop.
Investors can’t always associate a shrinking economy with dark times.
Here are the pros and cons of investing in a shrinking economy struggling to live through a recession.
Pros of Investing in a Struggling Economy
The biggest advantage of a recession is that stocks are priced at a low level. If an investor purchases shares at a low price and waits for recession to end, there are chances they will benefit. In the 2008 recession, the Indian Sensex crashed from 17,650 points in January of that year to 8,700 points in October. But it rose to 17,550 in October 2010. Somebody who would have bought shares in October 2008 must have made a fortune just two years later.
During a recession, real estate prices and interest rates are low. So, one can invest in property and get good returns when the economy comes back on track and property rates swell. Similarly, as the economy falls, investors find gold the safest investment, so the metal’s prices generally rise during a recession. It was no exception this time, as the gold rate reached at a peak of Rs 55,400. The best idea is to purchase gold in the beginning of a recession and sell it when the prices hit peak.
Investment in essential commodities companies, e-retail, e-learning, communication, digital health and big technology firms are the safest investments. They have proved to be COVID-19-proof and offer smart returns to investors.
The agriculture industry was also not impacted substantially by the recession. Most of its credit goes to the government’s financial aid to farmers, availability of low-wage laborers and direct benefit transfer into bank accounts. So, the investment in agriculture start-ups or products is also a safe bet.
Most of the stocks go into the red, but the nature of the share market also changes during a recession. So, it is very necessary that we take a note of shares which are in green, require low investment and are virtually risk-free. Restrategizing investment patterns can also ensure profit.
The recession did little damage to companies which are fundamentally strong, have stable management and have low debt. Stock of such companies sustain even in unusual circumstances. Investments in such companies can give good returns.
Cons of Investing in a Struggling Economy
One can’t get over ambitious during the recession. It’s true that the prices of stocks fall, but they may not give the desired results when the market recovers. Or, after scaling a high, the share prices can fall, as fluctuation is a regular feature of the market. Though certain type of companies do well during recession, it is still impossible to predict their performance. It’s better not to invest all your money in one company however successful it may be.
Recession is the best time to invest only if you have an expendable income. Suppose if you buy shares at a lower rate but lose your job during pandemic, your whole planning of earning profits post-recession will go for a toss. Many people are in habit of borrowing money and investing it in the share market. Such tendencies can backfire if the market fluctuates and one faces pressure to return debt.
One may make money through mobility and retail company shares during normal times, but production halts in many of these companies during recession. As a result of which investors also lose money.
Watch: Best Things to Invest in During a Recession
Some investors trade in penny stocks. Penny stocks are going through a purple patch in India as 87% of them rose sharply. Yet they have higher level of volatility. Companies who own penny stocks have limited cash and resources. They have high chances of going bankrupt during recession. So, investors should take precautions before investing money in penny stocks.