Why Should You Invest In An Economic Downturn
The markets are weak, unemployment is on the rise, and investor confidence is at an all-time low. It’s an economic downturn that could inevitably lead to a recession.
So why are we talking about investing in a time like this?
Simply put, weakening markets are not all a bad thing. It could hold potential profits for those who are willing to bide their time.
However, there are a few important questions you need to ask yourself before you dive into investing now.
Can you afford it?
Before we even begin to consider the recession as an investment opportunity, it is important for you to figure out if you can spare the financial resources. While this could potentially lead to long term gains, there are still substantial risks involved.
In other words, you need to make sure that your finances are able to shoulder any potential losses. Ensure that you:
- Have at least six months’ worth of emergency savings
- Have an income that can cover your monthly expenses and commitments
- Can commit these funds to investments for more than five years
What are market conditions like?
A recession is defined by two quarters of negative GDP growth. The good news is that Malaysia is not yet in a recession. There was positive economic growth before the start of the pandemic-induced movement control order, and we’re looking at some sort of recovery by the end of the year.
However, the last three months of economic uncertainty have wreaked havoc on the stock markets. So while we’re not yet in a recession, it feels like one is looming up ahead – which is all that needs to happen to drive stock prices down.
At the time of writing, the KLSE Composite Index is at a five-year low – and this is after recovering from a massive slump in January 2020. It has also been showing a downward trend since the middle of 2018.
In fact, Forbes was of the opinion that the US is 4.5 years overdue for a recession in 2018. As history has shown, when the United States of America experiences economic problems, so does everyone else.
As such, it doesn’t look good for the short-term global economy.
So why invest now?
The economic cycle goes through four stages: expansion, peak, contraction, and trough.
Expansion is when the economy grows, and employment rises. The peak is when everything is running at economic output is at its maximum and there is noticeable upward pressure on prices. This leads to a contraction as the market corrects itself with reduced output and increased unemployment. Finally, the trough is the lowest level of possible contraction and the economy begins the cycle once again.
What goes down, tends to come up again. At least as far as the economy as a whole goes. Your mileage may vary for individual investments.
Investors that can afford it look at economic downturns and market dips as stocks going on sale; taking the opportunity to make long term investments.
This is the reasoning behind the popular quote from Warren Buffet, “be fearful when others are greedy and greedy when others are fearful”. A greedy market drives prices up and is a sign that the economy is reaching its peak. On the other hand, fearful investors are a sign that stock prices are dropping.
Knowing that the economy recovers, then it is perhaps a good idea for the brave investor to buy into industries that can survive the downturn and eventually ride out the turmoil into the expansion part of the cycle.
Is this for you?
Making an investment during a recession is not for the weak of heart, especially if you are the type to obsessively check your portfolio. There is no way to tell when an economic contraction will end. Nor is there a way to tell if you’re in the trough.
It will not do your blood pressure any good to watch your investments shrink in the short term while you wait out the recession.
These economic cycles run for about 10 years or so. Malaysia experienced financial downturns in 1997, 2008, and our current downturn began in 2019. With this cycle, we can anticipate that anything you do now will be to prepare for the next peak in the economic cycle.
It is also important to note that overall, the next trough is not as low as the previous cycle. You will still come out ahead as long as you focus on the very long term. So prepare yourself to do your homework on the industries that will recover the fastest, and prepare to sit on the investment for several decades.