There’s no bunker in a recession. When it hits, most economic activity is affected.
Investing, of course, is no exception. And while no asset class has the sole power to shield an investment portfolio during a recession, a few asset classes have historically shown to hold stronger in times of economic uncertainty.
I’ll go over some of them in a minute, but first, let me mention a few important points you should consider as you look to diversify your investments.
So, Are We in a Recession?
If you’ve been paying attention to the news for the last year, you’ve probably seen that popular opinion is divided on one of today’s hottest debates—are we in a recession?
Though I cannot speculate with a lot of clarity on the health and near-future outlook of the U.S. economy, it’s helpful to take a look at some cold, hard facts.
- The unemployment rate in the U.S. is currently at 3.6%—the lowest level in 50 years.
- We’ve heard about massive tech layoffs, but we’ve heard less about the over 10.8 million job openings.
- Real gross domestic product (GDP) experienced positive growth in the second half of 2022.
- Consumer spending continues to decrease, as the average American feels (and may very well be) less wealthy.
- The manufacturing sector is still caught in a slump.
- Real wages and earnings have decreased these past few months.
So, although the big picture might not look that bad, the day-to-day reality shows the economy isn’t doing too well. And no matter how we define it, many economists still believe that an official recession awaits us in 2023.
Our take? It’s best to plan for things to be a little tougher, and invest in assets that can help you weather the uncertainty that lies ahead.
Why Diversification Matters
Clichés help to make a clear point, so I’ll just go ahead and say it: don’t put all your eggs in one basket. This is the idea behind diversification.
That is to say, if you are invested in different companies, markets, and asset types, and one of your investments loses value, your portfolio is still protected by the rest of your investments.
By spreading your investment efforts, you mitigate the overall risk you take on. For everyday investors, this is key to build a healthy portfolio.
Recession or no recession, we’ve agreed that the economic environment that we are all navigating isn’t the best. Inflation, interest rate hikes, skepticism, failing banks, daunting forecasts, pessimism, and plain ol’ uncertainty. More than ever, stability has a nice ring to it.
Diversify to keep your returns potential aimed up and to the right, and don’t be surprised if you see them grow.
3 Investments to Consider
When the economy stumbles, our natural reaction might be to sit still or sell at the wrong time.
But this isn’t the smartest move. Instead, don’t let fear get the best of you, and keep your eyes open for new opportunities that are sure to arise.
So, where could you invest during a recession? Here are some of the usual suspects.
1. Index Funds
By owning stock in a company, you own a bit of that company. The better that company does, the more returns you’ll have on your investment. However, if that company performs poorly and all of your eggs are in its basket, you’re going to take a big financial hit.
That’s the case for index funds: the shares that you invest in are scattered across different companies, as opposed to individual stocks. An index fund is a type of mutual fund whose holdings match or track a particular market index (e.g., the Nasdaq 100 and S&P 500).
The fund you invest in will purchase shares from all of the companies in the market index it tracks. The individual investor (i.e., you) then buys shares from the fund, with the expectation that the performance of the fund will mirror the gains (or losses) of the index it tracks.
The big advantage here is that this is a passive management strategy. That is to say, you won’t have to rely on the whims of a manager as they buy and sell stocks. Most active fund managers won’t outperform the market. With an index fund, you are not only mitigating risk, but you’re giving yourself a fighting chance to match the overall performance of the market.
Read about some of the most interesting index funds here. Also, check out this write-up by NerdWallet to learn more about this type of investment.
2. Real Estate
Given that most businesses need a brick-and-mortar location, commercial real estate is an asset class that will always be in demand.
While other investments may react with volatility to economic uncertainty, real estate can help hedge against inflation. In fact, the data proves real estate’s historical resilience. According to the Federal Reserve’s consumer price index, demand for rental residency has been on a 50+ year upward trend.
You also have the added benefits of this class being a tangible asset (i.e., in most cases, it will maintain value), the fact that it is likely to appreciate over the long term, and you have a lot of options for commercial projects.
Now, it’s important to remember that not all commercial real estate markets will perform the same during a recession. For example, storage units, restaurants, and hotels are all likely to react differently to uncertainty, and location will be a big factor.
The bottom line? It’s worth doing some homework on these opportunities.
3. High-Yield Savings Account
Who needs cash, anyway?
I’ll answer—we all need cash, all the time.
Having cash at hand gives you the freedom to buy whatever you need and want, peace of mind in case things go south professionally, and the flexibility to invest in a good deal when it appears.
But instead of stacking it under your mattress or stuffing it in a jar (where it’s not protected from inflation), we suggest considering a high-yield savings account. Basically a savings account on PEDs, this account earns, on average, 17 times more than a regular savings account.
Now, there is one pain point that you should be aware of: most financial organizations that offer high-yield savings accounts are specialized.
That is to say, they probably won’t have many other financial products to offer. So, if you are OK with splitting your checking and savings accounts between two financial institutions (and, given the recent bank failures, this is probably a good idea), then this type of account is right for you.
Here’s a good list of the best high-yield savings accounts for you to take a look at.
Why Our Money’s On Mid-Market Real Estate
We’re called Vicinity for a reason: we believe in the power of investing where you live. Sure, there’s the emotional value, but the financial value is very real as well.
If you’ve never heard of mid-market real estate, here’s an easy way to picture it:
Individual real estate investing is usually associated with buying a home. On the other side of the spectrum, we have huge commercial properties, usually owned by institutions. Between them, we have mid-market real estate for small and medium-sized businesses.
If you’re looking to invest some savings (and avoid the cost/commitment associated with home ownership), mid-market real estate might be right for you. This asset class offers the potential for higher returns, plus a few other critical advantages:
- Affordability: you can choose to invest any amount you can.
- Local advantage: deals are typically local, so it’s easier to engage in due diligence.
- Oversight: you can see your investment coming to fruition, literally.
The key to investing in this dynamic asset class? Regulation Crowdfunding.
Also known as Reg CF, this securities exemption allows private companies to raise capital from the public, thereby democratizing investing.
We’ve written extensively about Reg CF and mid-market real estate in other articles (see here and here), so feel free to roam around our blog to learn more.
Don’t Forget Due Diligence!
I wouldn’t feel responsible if I didn’t recommend that you research, study, and analyze any investment you’re thinking of making.
As much as investing in a recession is focused on mitigating risk, risk will always be a part of the equation. For this reason, you should never invest without engaging in proper due diligence.
If you can’t find the information you need, don’t move forward. One of the great benefits of Reg CF platforms like Vicinity is that they/we are required to give you all the details (background, financials, stakeholders, etc.) of each deal, so it’s much easier for you to perform due diligence.
When investing, an informed decision is the best decision.
Mitigate Uncertainty With Vicinity
Whether or not we will see a recession this year, it’s a good idea to diversify your portfolio sooner rather than later.
Don’t wait until things get bad (or worse) to invest in assets that can help you mitigate risk. Local, mid-market real estate investment opportunities are an option where we can help. If you are interested in learning more about investing through the Vicinity platform, reach out to us to learn more.
If you’re ready, sign up and make your first investment today.