Short Guide To Investing During A Recession
With the recent 75-basis-point rate increase by the US Federal Reserve that is spurred by inflation due to rising energy costs, choked-up supply chains, and an economic downturn worsened by the Russia-Ukraine war situation, we may be heading for an impending recession.
Closer to home, Singapore's central bank has released a statement that includes a forecast of global growth expecting to moderate from 5.4% last year to 3.9% in 2022. In such trying circumstances, it can get pretty scary to continue investing or even to start investing in the stock markets.
However, many may also take this opportunity to leverage on the low prices as more stocks (and many other assets) have crashed. So buying them at low prices now may increase your chances of selling the stocks at a profit in the future. If you've been checking out MoneySmart's online brokerage comparison page, you may have noticed that there's a range of online brokerages which are good for Singapore stocks or foreign stocks, which can be a good place to start while you're still thinking of which types of stocks to invest in.
What Is A Recession?
There are many causes that can lead to a recession, and given our current global economic situation, there seems to be a stagflation condition that was initially spurred by increasing energy costs, supply chain obstacles spawned by the COVID-19 virus outbreak and then, the Russia-Ukraine war, which could possibly drive many economies around the world into a recession.
While there is no “official definition” of a recession, most economic development boards around the world or monetary policy authorities like the Monetary Authority of Singapore (MAS) look at various characteristics that define a recession, which generally include a decline in GDP, employment, manufacturing and retail sales, as well as decline in demand.
Declines in these 4 aspects are usually detected by governing authorities before a fall in GDP (which are measured quarterly). However, countries may also be considered to be in a recession even without a drop in GDP, because once there are declines in the 4 indicators mentioned above, it gets pretty obvious that there’s an economic contraction.
Are We Headed For A Recession?
With so much going on around the world recently, we can expect many countries to be moving towards a possible recession. In the 28 June 2022 speech by Deputy Prime Minister and Minister for Finance Lawrence Wong, he mentioned that there could be “a recession – if not stagflation”. Many are looking to the past recessions for insights, but the current crisis we’re facing is very different from the 2020 recession or the 2008 global financial crisis.
A glimmer of hope
Despite the current economic challenges, the economic downturn may or may not be worse than the 2020 recession as the Ministry of Trade and Industry (MTI) forecast released on 25 May 2022 indicated that Singapore's GDP has been maintained at 3% to 5% and there's a likely growth at the end of this year.
This is a more hopeful situation for us (including investors) as compared to 2020 when there was a 3% drop in the global gross domestic product (GDP), much greater than the 0.1 contraction in 2008.
How does a recession affect you as an investor?
As stock markets become bearish, you can tap on this opportunity to get more shares at lower prices. If you’ve already started investing since 2008 or way before that, you’ll probably know that there may or may not be an economic downturn coming soon. Either way, the stock markets are not doing well at the moment and forecasts have shown that the economy is unlikely to do well anytime soon. So, as an investor, you’ll be on your toes during cyclical economic downturns like this recent one.
Besides holding stocks until the market recovers, you’ll be tempted to look at property and other assets like gold and silver. If you’re financially able to support a new home, it may be a good time to buy property as prices usually dip during such situations.
Recession-proof Industries To Look Out For In A Recession
By now, we may have heard that many stocks may be heading into a bear market or have already crashed at some point of time. On a brighter note, there are promising market sectors that will perform well amidst this crisis. Let’s take a look at some of the potentially viable ones.
With greater demand for energy resources that is fueled by the Russia-Ukraine war, we can expect energy shares to surge even higher. So you can consider investing in popular US energy stocks like Chevron and Occidental Petroleum, and even some promising Singapore energy stocks including:
- PEC Ltd
- Rex International Holding Limited
- China Aviation Oil (Singapore) Corporation Ltd
- Geo Energy Resources Limited
- Hai Leck Holdings Limited
Consumer staples and utilities stocks
Regardless of economic downturns, the demand for essentials like food and beverages, personal care, and household cleaning products usually remains strong and relatively stable, making consumer staples stocks much safer to invest in as compared to other sectors like travel and tourism, cars and luxury goods. Some resilient food staples stocks include Coca-Cola, Procter & Gamble, Kimberly-Clark, General Mills, Sheng Siong Group and Dairy Farm International, just to name a few.
Home improvement retail stocks
The increasing demand for home improvement products which is driven by demand for construction of new homes including HDB flats (as per BCA's January 2022’s forecasts) will also mean that home improvement stocks may go up and stocks like Sea Limited, Etsy and Home Depot are highly attractive choices to invest in.
How do I start investing with $1,000?
Starting your investment journey seems very daunting at first. Learn more on what stocks and asset classes you should look into when you start investing as a beginner.
Things To Avoid When Investing In A Recession
Curb a big risk appetite
No matter how small or big an investment you make, there’s bound to be some risks involved. Before you decide to invest, you’ll need to know the level of risk your investment entails, and how to manage these risks to avoid burning your fingers and end up drawing down retirement savings especially in difficult times.
Determining your risk appetite is very simple as it's akin to rating it on a scale where a minimal risk appetite yields smaller and perhaps more stable and consistent returns, while a bigger risk appetite naturally means higher tolerance for larger gains and losses (or volatility/swings) and vice versa. So if you‘re somewhere in between with a moderate risk appetite, you’re most likely targeting moderate potential returns over a medium to long term period under normal market conditions.
Avoid “sector rotation investing”
If you’ve heard of sector rotation, you would have known that it is very much time-based and in simpler terms, it’s timing the market. When the economy is doing well, certain sectors like technology stocks or travel stocks seem to do well. On the other hand, during economic downturns, sectors like consumer staples and utilities stocks tend to be more consistent and stable. Some investors are able to strategically move from one sector to the other in time, and avoid large dips in certain sectors.
However, for those who are less experienced investors, they may risk getting burned because by the time that trade catches on, it may be too late to get out. If you’re a lower risk investor and aim to maintain solid returns, you’re better off buying diversified index funds which have a lower volatility.
Be wary of the Wash Sale
At times when you choose to use the “tax-loss harvesting” investing strategy to reduce your losses during a stock market crash, you’ll need to look out for the wash sale.
If you do not know what a wash sale is yet, we’ll let you know right now — it happens when you manage to sell a stock or any other form of investment asset and then repurchase the stock or asset or something similar to it, at a similar price. So it sounds like “a wash” as the sale and repurchase does not really change your portfolio composition or performance.
3 Tips For Investing During A Stock Market Crash
Set aside a practical amount for investing
Setting realistic expectations and goals must always be on your priority list when investing as you don’t want to end up burning your fingers in the stock market.
A safe and manageable “investing” amount should be your savings minus your emergency fund and any other money you’re setting aside for a specific use, such as your child’s university education, home renovation loan, retirement fund, etc. Bear in mind that you need to be prepared to lose some or even all of this “investing” amount due to the risks involved in investments, but it’ll be unlikely if you invest cautiously.
If you’ve a small risk appetite, $100 to invest a month would be a good amount to start, because most stocks are bought/sold in lots of 100. If a company's share price is S$1, you will need to invest at least S$100 for 1 lot of 100 shares on SGX. However, you still get charged the minimum commission of S$10, which eats into your profits significantly. Alternatively, you can opt for a Regular Savings Plan or robo-advisor, which allow you invest small amounts regularly (e.g. S$100/month) without having to fork out so much for commission fees.
Although it doesn’t offer high returns like stocks, government bonds are much safer options given their history of predictably steady flow of repayment. As most government bonds must be purchased from a broker, which can get rather costly and complicated for many individual investors, it may be wiser to opt for retirement and investment accounts as these accounts often offer bond funds that include many denominations of government bonds.
Try the dollar-cost averaging approach (DCA)
This approach is similar to having a budget for your groceries and finding a way to stretch every dollar you have. When there’s an offer, and at other times Some months when there’s an offer and there are discounts on certain foods or when there’s a good harvest of some fruits, you can buy a lot of those items; on other months you buy less as vegetables or seafood are pricier due to the festive season or a drought or war happening elsewhere.
This goes the same for stock investing. When stock prices are low during times of turmoil, you can buy more units of that particular stock that you prefer; when prices are higher, you buy fewer. In this way, it spreads your buys out and reduces your risk plus the stocks you accumulated at “discounted” prices will all be worth more when prices are higher and you can make a profit out of selling them at better prices when the time is right.
Frequently Asked Questions
Is it safe to invest during a recession?
- Yes, as long as you practice caution and use effective strategies. You can choose to take this opportunity to leverage on the low prices as more stocks (and many other assets) have crashed. So buying them at low prices now may increase your chances of selling the stocks at a profit in the future.
Which stocks are better to invest in during a recession?
- This really depends on the causes for the recession and what are the ongoing issues i.e supply chain delays, unemployment, rising oil prices, war between countries, etc. However, regardless of economic downturns, the demand for essentials like food and beverages, personal care, and household cleaning products usually stays strong and relatively stable, making consumer staples stocks much safer to invest in as compared to other sectors like travel and tourism, cars and luxury goods.
Is dollar-cost averaging useful when investing?
- Yes. When stock prices are low during times of turmoil, you can buy more units of that particular stock that you prefer; when prices are higher, you buy fewer. In this way, it spreads your buys out and reduces your risk plus the stocks you accumulated at “discounted” prices will all be worth more when prices are higher and you can make a profit out of selling them at better prices when the time is right.
What is “sector rotation” in investing?
- It’s a strategy that involves moving from one sector to the other in time, and avoiding large dips in certain sectors.
Should I invest in gold in a recession?
- Yes. Gold is one of the more viable and stable choices for investment during economic downturns.
Are bonds good to buy during a recession?
- Yes. Government bonds are much safer options than other assets like stocks given their history of predictably steady flow of repayment.
Can tax-loss harvesting be risky?
- Investing strategies like tax-loss harvesting carries a certain amount of risk but when you use it with caution, it can be beneficial for your investments. You just need to avoid the “wash sale” effect when adopting tax-loss harvesting. When you sell a stock or any other form of investment asset and avoid repurchasing that asset or something similar to it at a similar price because it is a total waste of your time and it does not really change your portfolio composition or performance.