DEBUNKING RECESSION INVESTING MYTHS
It is difficult to prevail ‒ or scale back losses at the very least ‒ when recession strikes. Not to mention the emergence of different myths about recession investing. Let this article debunk the six common investing misconceptions.
Bonds are the safest investment… but it is the other way around. Bond prices move in the opposite direction of yields. The price of a bond, in the event the rate of inflation ascends substantially, may decline 10% or more. But you obtain the same amount of income similar to the previous year. On that note, consider an ETF or mutual fund with hundreds of individual issues. Avoid longer-maturity bonds as it have the tendency to be more volatile when interest rates increase.
Decoupling is the better option. Decoupling takes place when two different asset classes, which normally rise and fall simultaneously, move in opposing directions. In simplest terms, it is a decline in correlation. One example of economic decoupling is emerging markets no longer need to depend on US demand to ignite economic growth. During the 2008 financial crisis, many stipulated growing economies in Asia and South America have developed to the extent they can continue to expand even if Western economies undergo a recession. But this was proven otherwise, as almost all markets worldwide suffered equally.
Dividend stocks do not decline as much. When economies are progressing, companies with enough net income may pay 20% to 30% of it as a dividend. But when recession hits, their net income may decline by more or less 50%, putting the dividend payment at stake. Having said that, dividend stocks may face two types of downward pressure: likelihood of lower profits and anxiety among investors the dividend may be reduced or removed.
Invest in safest stocks to earn money. Yes, but only before the recession takes place. Safer, defensive stocks tend to plummet less than cyclical stocks including basic materials, financials, and retail stocks. However, the safe stocks may underperform once the recession surfaces. As soon as the market starts to move forward again, the most beaten down names climb the fastest. Remember, during recession, the first consideration is to whether to enter the market or not. After deciding, it is best to stay the course by engaging in the broad market.
Real estate is a safe haven. Deflation is one of the common symptoms of a weak economic condition. Prices of goods drop because of too much supply, and there is insufficient demand to support prevailing prices. Same thing with real estate. This industry triggered the past financial crisis, as years of heavy home building activity halted and inventories rose drastically. As a result, prices fell more or less 30%. Needless to say real estate is not a safe haven during recession.
Recession is over when stock market ascends. The stock market has always employed a forward-looking mechanism, recession or no recession. Having said that, it will attempt to expect the end of a recession way before it can be validated through economic data like GDP. The market always do not get it right, which means the stock market could initially surge only to plunge again as the recession proves more stubborn and lengthy than first projected.
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