What to invest in during a recession…

My husband Ben and I have been discussing where we want to put our money this year, in light of a possible recession.  (He’s a little bearish on the economy right now, due to the recent downward trend of the stock market, the credit crunch, and so on.)

As I’ve mentioned before, we’re trying to put a significant amount of money into savings and investments… all of my income and 15% of his (plus employer matching on his 401(k), and we don’t want to stop just because the stock market is down.

However, we also have some uncertainty ahead… we’ve talked about saving up for a bigger house at some point in the next few years, as well as having our baby – due May 15th – which could possibly create some financial chaos if there are health complications or my earning is disrupted.

Bottom line, we want to be maximizing our investments, while continuing to be prepared for any curve balls life may throw at us.

I like houses and stock… since $10,000/year automatically goes into our Roth IRA’s (which are invested in Vanguard’s 500 Index Fund and Vanguard’s Extended Market Fund (small and midcap stocks) we’re pretty well represented in the stock market.  Ben has his IRA contributions going into a small-cap stock fund at Baron’s which has a good 10-year track record, although the fees are a little higher than we’d like – 1.3%  a year.

So, if we keep those contributions going to stock, and put the rest into a house or two each year, or a Grassland’s commercial property purchase, that’s would keep us pretty much on par with what we’ve been doing for the past couple of years.

However, we had concerns about the possibility of an upcoming recession and wondered if we should consider changing our strategy to account for a possibly recessionary market, and inflationary currency.  (I have learned that inflation is most common during a vibrant market when there is lots of spending and easy credit.  For example, many markets saw price inflation for houses over the past several years.  That implies to me that inflation is not such a concern during recession.  However, with the Fed continuing to cut interest rates to spur the economy along, it’s hard to know what market forces will prevail.)

My thought is that if the stock market is down, it’s a good time to buy, and if we are buying affordable housing, it will keep it’s value whether more people go through as renters (which may drive up rental rates), or if we see the housing market turn around, we’ll have been able to stock up on inventory while things were cheap.

However, here’s what the experts are advising:

1. Consider investing in bonds, especially corporate bonds.  The bond market usually does well when interest rates are cut, and the Fed usually cuts interest rates during a recession.  They seemed to say you could expect a 6-7% rate of return on investment grade corporate bonds.  Beware, though, fixed-rate returns (such as those on bonds) are a dangerous place to be if inflation rears its head.  If inflation is going up at 5% a year, for example, a bond at 6% will barely be keeping pace.  Short term bond funds may make more sense in this context.
2. Consider holding money in cash accounts (like CD’s or money market funds).  The thinking there being “at least you’re guaranteed to make a return.  However, if the economy goes through an inflationary period, I don’t know that it makes a lot of sense to be in cash.  Pundits also recommend going to cash as a security measure to guard against layoffs. 
3. Joshua Kennan at about.com recommends taking the opportunity of the “sale on stocks” to invest and stock up on stocks.  That assumes, of course that your investment horizon is long enough to wait for the market to come back.  The bad part about continuing to invest in stocks during a long downturn is that they may have flat or negative yields for a years-long period.  If inflation is high during this time, your investments will be losing ground.
4. During times of inflation, the stock market and bond market generally do not do well, but commodities futures do.  Unfortunately, commodities are a little bit complicated for average/beginning investors to understand and I myself don’t have a great grasp on how they work.  Gold is a commodity that used to be a common hedge against inflation; oil is another example of a commodity that has been doing very well over the past several years.   Both gold and oil prices are extremely high now, though, so they may not represent a good investment at this time.  The question there is: Do you think prices will continue to go up?
5. In a recent interview with Donald Trump, on his Mad Money show, Jim Cramer and Donald talked about their assessment that we are already in a recession.  Donald says now is the time to buy real estate.  He indicates that due to the sagging markets in many areas of the country right now, the money contraction that is increasing foreclosure rates and reducing the availability of credit for borrowing, that now is the time (and for the next 2-3 years) to be snapping up real estate bargains. The PMI Grouphas released a report projecting areas of the country and their likelihood to see price decreases in the next few years.  I was pleased to see areas where I own residential property (Seattle, Charlotte, and potentially Dallas/Fort Worth) were all in the lowest-risk category, assessed with a less than 10% chance of price decline at the end of a 2-year period starting now.

I will continue to research this issue, but it sounds like for us, for now, our strategy of keeping a healthy emergency fund, buying over time and “on the dips” into the stock market, and acquiring real estate in stable, cash-flowing markets should continue to pay off.

 Emily

Popularity: 100% [?]

Related posts:

1. Stock Market is In the Toilet
2. Rental Property – Can you handle the truth?
3. Do Duplexes in Seattle Make Sense?
4. Does Dallas/Ft Worth have the best ROI in the country?