Wednesday, 15 October 2008

Investing in a Recession and Avoiding Depression

Recession talk is common these days. The CBC reports that the OECD has forecast minimal growth for Canada in 2008 and is heading for a recession, while in the USA the Boston Globe says Economic Data Point to Recession.

Stock markets have suffered accordingly and you may be feeling like this man contemplating the decline in the Toronto Stock Exchange Index and the US S&P 500 (chart from Google Finance and photo from the Santa Barbara Independent).

So what can an investor do to minimize losses and take advantage of opportunities?

Stay in the Game - that may sound ironic, a prescription to lose more money and go down with the ship but ... is the ship really going down? The market may take years to recover but it almost surely will. When stock prices have gone down and negative sentiment prevails, it is an even better time to invest than when markets are rising and high. Buying now is buying low, maybe not the absolute lowest but getting attractively low, especially in the US and the UK. I strongly believe that someone investing for retirement years away should continue with a regular saving and investment plan.

Own Sectors with Staying Power - some types of companies and investments tend to hold up well even in bad times. Products and services that are essential will continue to be bought. Others may even leap ahead, either because they are a cheaper substitute for more expensive consumer goods, or because they provide a diversion or small luxury to replace the big ticket items that people defer buying.
  • Consumer staples - food, beverages, personal care and household products - see this Motley Fool article
  • Utilities - power generation, pipelines
  • Alcohol and tobacco
  • Pharmaceuticals
  • Bus transportation
  • Entertainment
  • Precious Metals, Timber and Commodities - see NuWire Investor
  • International markets - not all countries are equally affected by downturns; diversifying with the addition of foreign holdings will lessen the downward drops
  • Fixed Income in general and High-yield aka Junk Bonds - read this SmartMoney column to find out why
  • Banks!! - this may seem strange since this recession is due to the banking crisis. Bank stocks have been hammered in consequence so why buy? The opportunity stems from the fact that good bank stocks have been dragged down with the bad so this is an opportunity to buy low. The challenge is figuring out the good banks from the bad. Research and thought will be required. Check out Canadian Banks and Insurance blog for data, news and analyst reports. Online brokers like BMO Investorline and others have plenty of data and research reports on banks in Canada and the US.
Diversify - In my opinion, the most important strategy is to hold a diversified portfolio of investments and to exercise patience for the economy and markets to recover. It is well-nigh impossible to tell in advance when markets will recover from recessionary losses. By the time you can be certain of a recovery, it will already have happened (see a table of past US recessions and how variable they were in Wealth Daily's Recession-Proof Investments).

With wise action by the authorities, the economy should avoid depression (see CBC's report Replay of Great Depression Unlikely: TD Bank Says). With wise investing, there's no need for an investor to suffer depression either.

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