How to Invest in a Recession
Investing during a recession can be challenging as economic uncertainty causes stocks to lose value and real estate prices to decrease. Just because the economy is experiencing a downturn, however, doesn’t mean that you have to wait for better conditions in order to invest. The key is to choose safe investments where your money is protected.
AVOID RISKY INVESTMENTS
Investment risk is one of the most important things to consider during a recession. Although you may be able to earn great returns in the stock market, for example, there is a possibility that you could lose some or all of your investment.
During an economic downturn, a company’s stock price may decrease as consumers’ buying habits change and they have less disposable income. This could cause investors to lose confidence in the company and sell their shares, thus causing the stock price to decrease.
Investing in the stock market can also be intimidating for beginners. With so many different stocks to choose from, how do you pick the winners from the losers among thousands of choices? Analyzing different companies’ financial information could take hours and may be confusing if you don’t have a background in accounting.
Making sure any investment you choose is safe in a recession should be a primary concern. Thankfully, there are three great options to consider—savings accounts, money market accounts, and share certificates.
SAVINGS ACCOUNTS
A savings account is a special account that allows you to earn interest on the money you deposit. The main benefits of savings accounts are that they are easy to open and the federal government insures your investment for up to $250,000. They also have very low minimum deposit requirements. Depending on where you bank, $300-$500 is all you need to get started.
An important negative of savings accounts to consider, however, is that they usually have relatively low-interest rates. Other investments, like money market accounts and share certificates, usually have higher rates.
Another important negative of savings accounts involves withdrawing money. With a savings account, you may have to first transfer money to your checking account before you can withdraw it or write a check.
Finally, some financial institutions may charge a monthly account maintenance fee for their savings accounts. A fee will negatively affect how much interest you will earn.
MONEY MARKET ACCOUNTS
A money market account is another investment that the federal government insures for up to $250,000. They have the features of both savings and checking accounts.
Like a savings account, you earn interest on the money you invest, but you can also write checks directly from the account. They also usually have higher interest rates than savings accounts, which may allow you to earn more.
An important negative of money market accounts is that they usually have higher minimum balance requirements than savings accounts. Some financial institutions may also charge a monthly account maintenance fee, which will reduce your earnings.
Finally, withdrawals from money market accounts are usually limited to no more than six per month. This limit was put in place by the federal government and is known as Regulation D. The purpose is to make sure financial institutions maintain reserve requirements.
SHARE CERTIFICATES
A share certificate is a type of investment that is offered by credit unions. In exchange for earning a higher interest rate than other investments, you agree to leave your money deposited for a specific term. When the term ends (the maturity date), you can withdraw your money or reinvest it in another share certificate.
Share certificates provide you with predictable, guaranteed returns and therefore you can determine how much you will earn before opening an account. Like savings accounts and money market accounts, your deposit is also insured by the federal government for up to $250,000.
Another important benefit of share certificates is that you can choose the term. Share certificates with longer terms usually have higher interest rates than shorter certificates. The term for a share certificate could be as little as three months or several years.
An important disadvantage of share certificates is that you will not have access to your money if you need it for something before the maturity date. Although it is possible to withdraw money early, you will be assessed an early withdrawal penalty for doing so. It could be for a significant portion of the interest you have earned.
WHY YOU SHOULD HAVE AN EMERGENCY FUND
Recessions are usually times of economic uncertainty. Mass layoffs are common, the stock market may be volatile, and it could be difficult to predict when things will recover.
Having an emergency fund during a recession could be an important lifeline in case something happens. If you lose your job, for example, an emergency fund could provide you with the funds you’ll need for your living expenses until you can find a new one.
How much you keep in your emergency fund is up to you, although many financial experts recommend having enough saved to cover 3-6 months of living expenses. The more you have saved, the greater your financial cushion will be if an emergency occurs.
OTHER INVESTMENTS TO CONSIDER
Savings accounts, money market accounts, and share certificates are not the only investments worth considering during a recession. Here are two additional investments that may help you diversify your portfolio.
US TREASURY BILLS
US Treasury Bills are investments that are backed by the “full faith and credit of the United States government.” They are available in various terms up to 52 weeks. US Treasury Bills are sold at a discount below their face value. When they mature, you receive the full face value.
SHORT-TERM GOVERNMENT BONDS
Government bonds are issued by various government entities including local governments, states, and the federal government. Government bonds are not risk-free, so it's important to evaluate the creditworthiness of the government issuing the bond before investing.
LET GHS FEDERAL CREDIT UNION HELP YOU INVEST WISELY
Whether we’re in a recession or not, you should always invest your money in ways that are optimal for your own financial situation. At GHS Federal Credit Union, our representatives are here to help you make the right decisions based on your needs.
If you want to learn more about share certificates as an investment option, just click below.