When economic times are tough and the average individual is pinching pennies, many have the wrong idea about “conventional wisdom” when it comes to investing in stocks or exchange traded funds (ETFs) during a recession and recovery period.
Ryan Barnes of Investopedia outlines the following six investment myths in a recessionary economy:
- Safe stocks make money. This is generally true before a recession hits, but once a recession is in full swing it is the stocks or sector ETFs that took the biggest hit that stand to rebound the most.
- Bonds are the safest bet. This may not be true if inflation takes hold. A safe bet here is to hold a bond ETF as opposed to individual bonds. Bond ETFs help spread out the risk and give exposure that most investors would find cost-prohibitive.
- When the stocks market rises, the recession is over. Recent months have shown this isn’t true at all. The major indexes have all crossed above their 200-day moving averages, but unemployment runs rampant while retail spending continues to be depressed.
- Decoupling has made some nations safer investments than others. This implies that emerging nations can continue to thrive even if developed nations continue to suffer from a recession. This is not entirely true, however, because these nations need trading partners with healthy economies to sustain their growth and prosperity.
- Real estate is a safe bet. Real estate is ultimately just another asset that can boom or bust. After all, it was real estate that triggered the current crisis, and the market may continue to struggle for awhile.
- Dividend stocks and ETFs don’t fall as much as much as others. Companies need to make money to pay a dividend, and in recessionary times this is a challenge. Many companies did prove, however, that it can be done. You just have to look for them. Or better, invest in ETFs that hold them and let the providers find them for you.
In any climate, especially during a recession, there are areas that are moving. Instead of looking at the conventional thinking, look at what’s actually happening in the market and learn how to pick your spots. At that point, get in when you find opportunities by using a strategy for entry and exit.
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Kevin Grewal contributed to this article.