Recession's Impact: Investments Vs Savings

Recessions are often a time of uncertainty, especially for investors. While it may be tempting to bail out and cut losses, this is the time to ramp up exposure to assets that may offer potentially higher returns. Recessions can be a good time to invest as stocks have fallen, meaning investors pay a lower price for future growth. This is the classic buy low, sell high strategy. It is also a good time to diversify your investments and leverage tax advantages. While it may seem counterintuitive, recessions can be a good time to invest in the stock market, real estate, and high-yield savings accounts.

High-yield savings accounts

Interest Rates

The best high-yield savings accounts offer an APY of 5% or more, which is over 10 times the current national average. The interest rate you receive will depend on the bank and the state of the economy, but it's important to shop around for the most competitive rates.

Initial Deposit

Some banks require a minimum deposit to open a high-yield savings account. This can range from $5 to $100 or more.

Minimum Balance

Read the fine print to learn the minimum balance required to avoid service fees and earn the maximum APY. Some accounts have no minimum balance requirements, while others may require a minimum balance of $1,000 or more.

Fees

Many high-yield savings accounts have no fees, but some do. Monthly maintenance fees can range from $5 to $20. Make sure you know the fee structure before opening an account.

Compounding Interest

Find out how often interest is compounded (daily, monthly, or yearly) as this will affect how quickly your savings grow.

Online vs Traditional Banks

Online banks often offer higher interest rates and lower fees than traditional banks because they have lower operating costs. However, traditional banks are more convenient and make it easier to transfer money between accounts.

Pros and Cons

Maximising Your Account

To get the most out of your high-yield savings account, look for competitive rates, low fees, and no minimum balance requirements. Double-check the fine print regarding how long the rate lasts and how often interest is compounded.

Opening an Account

The process of opening a high-yield savings account will depend on the specific account and bank. Most banks require proof of ID, an application with personal information, and an initial deposit.

Alternatives

Money market accounts

• Vio Bank Cornerstone Money Market Account: Earns 5.30% APY on all balances, with a $100 minimum to open and no monthly fee.
• Quontic Money Market Account: 5.00% APY on all balances, with a $100 minimum to open and no monthly fee.
• Ally Bank Money Market Account: Earns 4.20% APY across all balance tiers, with no monthly fee or minimum amount required to open an account.
• Discover® Money Market Account: 4.00% APY on balances below $100,000, and 4.05% APY on balances above. There is no minimum balance requirement and no monthly fee.

Stocks

A recession can be a challenging time for investors, with stock market corrections and bear markets occurring during the contraction phase. However, it's important to remember that recessions are a normal part of the economic cycle and can provide opportunities for those willing to invest during this time. Here are some things to consider when it comes to stocks during a recession:

Recession-Resistant Industries

Some industries tend to experience relatively steady demand during both good and bad economic times, making their stocks fairly recession-resistant. These industries include healthcare, consumer staples (grocery stores, packaged food makers), utilities, and cost-conscious retail.

Examples of companies in these industries that have been recommended during past recessions include Johnson & Johnson, CVS Health, Pfizer, UnitedHealth Group, Walgreens Boots Alliance, Kroger, PepsiCo, Procter & Gamble, General Mills, Tyson Foods, American Water Works, Brookfield Infrastructure, NextEra Energy, and Waste Management.

Defensive Stocks

Defensive stocks are those that offer products or services that people need regardless of economic conditions. These tend to include consumer staples, utilities, and healthcare companies.

Examples of defensive stocks that have been recommended during past recessions include Monster Beverage Corporation, Costco Wholesale Corporation, Church & Dwight Company, The Procter & Gamble Company, CMS Energy Corporation, Atmos Energy Corporation, Mondelez International, and WEC Energy Group.

Diversification

Diversifying your portfolio is always important, but it becomes even more critical during a recession. Investing in companies across multiple sectors, including recession-resistant ones, can help you weather the downturn.

Value Investing

Some investors view a recession as an opportunity to buy high-quality companies at discounted prices, expecting that the market will recover and these stocks will increase in value over time.

Long-Term Perspective

For those with a long-term investment horizon, recessions may have less impact on their portfolios. Short-term problems may not significantly affect the overall performance over a 20- to 30-year period.

Blue-Chip Stocks

Blue-chip stocks, or those of large, well-established companies with strong financial performance, can be attractive during a recession as they tend to pay dividends, providing a tangible return in the form of income.

Timing the Market

While it's tempting to try and time the market by buying at the lowest point, this is extremely difficult to do. Instead, focus on finding good investment opportunities and be prepared for prices to move lower.

In summary, while a recession can be a challenging time for investors, it also presents opportunities. By focusing on recession-resistant industries, defensive stocks, diversification, value investing, and adopting a long-term perspective, investors can position themselves to weather the downturn and potentially benefit from the recovery.

Real estate

While there is no such thing as a truly recession-proof investment, real estate can be an attractive investment during a recession.

Firstly, you may be able to buy property at a cheaper price than during a strong economy. Then, when the economy picks up and consumers have more disposable income, the value of your real estate may rise.

Secondly, you may be able to secure a better mortgage rate during a recession, when interest rates are typically lower. You can lock in an attractive mortgage payment for potentially decades, so even if rates rise later, you still have that below-market mortgage rate.

For example, many investors took advantage of the last recession by scoring a 30-year mortgage below 3%. As inflation rose, they were able to pay back the mortgage with cheaper dollars, making real estate an attractive inflation hedge.

However, it's important to remember that real estate markets tend to suffer during recessions, due to higher interest rates and lower overall spending power. As a result, there may be more homes on the market, but your purchasing power may also be diminished.

If you're considering investing in real estate during a recession, it's crucial to do your research and be honest about your finances. Understand how solid your finances are and be prepared to ride out the downturn.

• Location: Properties in high-demand, low-supply locations tend to offer greater protection from losing substantial value during economic slowdowns.
• Rental income: Multi-family homes that bring in rental income can provide some insulation from market downturns.
• Scarcity: When there is a scarcity of properties in a particular market, it sets up your investment for success.
• Design and attention to detail: Thoughtfully designed homes with great attention to detail will stand out even in a cooling market.
• Walkability and accessibility: Properties in central, walkable neighbourhoods, especially those with easy access to the nearest airport, are perpetually in demand.
• Lot size: Sometimes the land a house sits on is more valuable than the house itself and will help strengthen your investment.

In summary, while real estate investments are never entirely recession-proof, they can be a good opportunity during a recession if you have the financial means to ride out the downturn and take advantage of lower prices and interest rates.

Dividend stocks

However, not all dividend stocks are created equal. Some sectors, such as discretionary firms, basic materials, energy, and real estate, have historically been more likely to cut or suspend dividends during recessions. This is because they are more sensitive to economic downturns, as consumers and businesses may have lower cash flows and earnings, which can result in reduced revenue for these companies.

So, when choosing dividend stocks for a recessionary environment, it is essential to focus on sectors with high rates of cash flow, strong margins, and robust balance sheets. These sectors include technology, industrials, and consumer staples. Companies in these sectors are more likely to have the financial health to maintain or even raise their dividends during a recession.

• Mid-America Apartment Communities (MAA): A real estate investment trust (REIT) that owns and operates apartment communities in high-growth Sunbelt markets. It offers a necessary product, has a large addressable market, and has the ability to raise rents. MAA has raised its dividend payouts for 12 consecutive years and has a compound annual return of about 15%.
• Bank of New York Mellon (BK): A trust bank that holds securities on behalf of customers, such as mutual funds. Unlike commercial banks, it relies primarily on fee income rather than deposits and loans, making it less sensitive to economic downturns.
• Realty Income (O): A REIT with a 27-year track record of growing dividends annually. Realty Income leases properties to tenants in recession-resilient sectors, such as grocery stores, pharmacies, and automotive service centers. It has a strong financial profile, with an A-rated credit rating and a conservative dividend payout ratio.

In addition to individual stocks, investors can also consider dividend stock funds, which provide the benefits of diversification and reduced risk while still offering solid dividend yields.

It is important to remember that dividend stocks are not a guarantee against losses during a recession. However, they can be a valuable tool to help reduce volatility and provide a steady income stream during uncertain economic times.

Frequently asked questions