How to invest to prepare for a recession

The economy has this worrying sense of “what’s next,” and we’re all looking for ways to secure our money.

With inflation on the rise and a possible recession, it’s important to have a game plan that can help you protect your money – and your sanity (i.e. reduce your stress!)

But when considering your investments during a recession, you must first understand exactly what a recession is and what its relationship to the stock market looks like. “A recession is two consecutive months of declining GDP,” says Alec Lucas, Ph.D., director of fixed income strategies and director of research at Morningstar Research Services. “It’s a backward-facing metric. However, the stock market looks to the future.

That is, a recession can only be confirmed after it happens, which means – as you might have already guessed – you can’t time the markets. But luckily there are places you can invest that have always been better during recessions and overall. Here’s what savvy investors should look for.

Look at business models first

When looking at publicly traded companies that will continue to generate revenue even when times are tight, you’ll need to compare companies broadly to estimate how well they could withstand market downturns.

Here’s an example from Lucas: Take McDonalds (MCD) versus Starbucks (SBUX). While Starbucks headquarters manages all of its storefronts and is responsible for its own inventory, McDonald’s, on the other hand, operates its business by selling licenses and renting properties to franchise owners.

“Think of it this way. Let’s say I work for the McDonald’s company,” Lucas says. “And you’re like, ‘Hey, I want to open a McDonald’s. What will it cost me? I tell you, “You pay me a fee and you become McDonald’s. On the other hand, with Starbucks, they own and operate all of their locations, which means “their head office is responsible for buying the coffee beans, the cups, the plastic lids, everything. If they don’t sell all the bananas, for example, then the main Starbucks company is responsible. While McDonald’s, they are not. That’s why profit margins are often much higher for McDonalds than for Starbucks,” says Lucas. “You can look at a company’s financial report and find out all about it.”

Lucas says he once bought shares of McDonald’s for his own children. “What has made McDonald’s such a good investment is that they own their real estate and license their franchise. Not only are their franchisees paying them to license the McDonald’s brand, but they are also paying them a rent.

But the point here isn’t the difference between two companies’ business models – the point is that it’s not because you see a company’s logo on every major street corner. not mean that they are created equal in terms of the shareholder value they will deliver to you, as an investor, over time. So do your research. Make sure you are satisfied with the fundamentals of a company’s business model before investing.

Dividends are your friends

Dividend growth funds, which are funds that hold shares of publicly traded companies that pay regular (usually quarterly) cash dividends, may be a solid option to consider right now. Funds such as VIG or VDIGX are two suggestions from Lucas – but why dividend funds rather than growth stocks?

“Thus, a dividend growth strategy looks for companies that may not necessarily be the most profitable, but whose prospects should lead to increased dividends, which is usually accompanied by an increase in share price,” says Lucas. . “Those ones, when you look at them how they’re doing in downturns, they tend to do their best.”

Stay Diverse

While you may want to reallocate your portfolio in times of inflation, you don’t want to find yourself scrambling to diversify in a recession, which is one reason why it’s important to keep your portfolio diversified. at all times. (Nobody wants to have to sell at a loss when the market corrects.)

“As a financial planner, we don’t recommend adjusting your investment strategy based on forecasts of economic conditions or particular sectors,” says Jean Keener, CFP, CRPC Principal at Keener Financial Planning. “A better approach is to stay broadly diversified in US and international stocks and bonds. We recommend that you achieve this with low-cost index funds. Academic research shows that small companies and value companies outperform over time, so women can also ensure that their portfolios include a solid allocation to these companies (also through index funds).

Take inventory of your own life

So far in 2022, 24,000 workers have been laid off by tech companies, and more layoffs are expected. As the tech industry (and others) fluctuate, now is a good time to audit your own career. If you’re early in your career and open to change, it might be worth considering what jobs might offer security regardless of market conditions. If you work in an industry that may be prone to layoffs and are still looking to change careers, now might be a good time to think about it.

“If women had to make adjustments in anticipation of the recession, I would encourage them to consider their careers,” Keener says. “Some industries such as healthcare (especially in non-discretionary medical fields) and education will maintain their workforce regardless of economic conditions. In general, companies that provide services to meet needs rather than wants will fare better during a recession.

In short, recession protection starts with auditing your own life when you can. (And secondary turmoil in a more recession-proof industry matters too!)

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