This article was originally published on Bankrate.com.
With low unemployment and a booming, if slowing, economy, a recession may seem a ways off. But that boom has led to surging inflation, and to combat higher prices, the Federal Reserve has all but promised a recession by rapidly raising interest rates. While some investors remain hopeful that the central bank can fight inflation without pushing the U.S. economy into a recession, what’s the best way to invest when the next recession does end up hitting the economy?
Best investments during a recession
The best investments during a recession may not be what you expect. Many investors make the mistake of becoming more conservative, when the best long-term course of action is to become more aggressive, ramping up exposure to assets that may offer potentially higher returns.
The rationale is simple: After stocks have fallen, investors are paying a lower price for the future growth of those businesses. It’s the classic “buy low, sell high” that everyone knows but that relatively few can practice because fear so often gets in our way during a market downturn.
“Once we know we are in an economic recession, the equity investment markets are probably closer to the bottom than they are to the top in valuations – and many times those markets are already well on their way in a rebound,” says M. Tyler Ozanne, CFP, president at Ozanne Financial Advisors in Dallas.
“In other words, once we know we are in a recession, it is too late to flee to safety – you should have done that already,” he says.
Instead, a recession is a time to prepare for the ensuing rebound in markets. Of course, a recession is not just a downturn in the market, it’s also a slowing economy that could throw you out of work and cause other financial distress. How do you balance these potential outcomes?
Here are four investments to consider making during a recession and three that are likely best to avoid.
4 investments to consider if a recession happens
When markets fall, the first response for many investors is to bail out in order to stop the pain of losing money. By discounting stocks in these moments, the market is actually increasing the future returns for investors who buy in. Great companies are well positioned to continue to thrive in 10 and 20 years, so a decline in asset prices means your potential future returns are even bigger.
So a recession – when prices are usually lower – is exactly the …….