How To Make Money In A Recession
Updated: Jul 28, 2022
If there's a word that sparks a lot of fear and anxiety it is the dreaded "R" word, recession. However, there's no doubt that recessions are times when great fortunes are made if you can lean into sound financial action and invest cash wisely. This article is dedicated to five ways simple ways to make money in a recession.
What Is A Recession?
Simply put, a recession is when the economy stops growing and starts shrinking. Officially, a recession is defined as "a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters."
What Not To Do in a Recession
When you cut on the tube during times of a shrinking economy there are stark warnings about increasing prices, employer layoffs, and future pain; and when you scroll through your social feeds all your friends are shouting to the heavens above, SELL EVERYTHING. The data supports and informed experts would say:
Panic selling is the #1 fastest way to lose money in the stock market followed by panic buying.
The United States economy has seen 12 recessions in the 20th century and the S&P500 has not only rebounded every time but returned an average of 10.5% since 1957.
It's easy to react in hysteria and scream fire when there's smoke coming from a building, but jumping from the 5th-story balcony without first understanding your options would be a dangerous move.
Selling stocks during a market downturn is the worst possible time to sell. Doing so causes investors to lock in losses and miss out on future bull runs.
Likewise, panic selling without understanding market dynamics rarely does anything but destroy wealth.
But, you're here because you know (like I do) that the world has successfully beaten every single recession, and that panic without sound knowledge is hardly useful.
In fact, panic is more likely to lose you money than help. Why is that? Because assets go on sale during a recession. And buying assets at steep discounts is how so many fortunes change during a recession. So how can us normal people capitalize through investing during a recession?
Here are 5 simple ways to invest and make money investing during a recession:
Save. Save. Save. (1.52% avg. annual return in Savings Account and up to 3.25% for CD’s) While it sucks that interest rates are going up for folks with debt, like those of us with mortgages, credit card debt, etc.— it’s great for savers. While we normally get close to nothing for interest in bank accounts, we now will see real returns with traditional savings accounts, money markets, and certificate of deposit (CD) accounts. Coming from a 10+ year Banker, I'm happy to say...Yes, finally, your hard-earned emergency fund will return some interest!
Buy Treasury Bonds. (1.97% avg. annual return for 45 days up to 3.091% for 30 years) Just like interest rates are up with savings accounts rates are also up with Treasury Bonds. Add in the advantage of Treasury Bonds being known as the safest investment option America has to offer "backed by the full faith and credit of the U.S. Government. Treasury Bonds come in maturation increments up to 30 years. You can buy them directly through treasurydirect.gov. Now is a great time to buy bonds given inflation, which brings me to recommendation #3...
Take advantage of Series I Bonds. (9.62% avg. annual return up to 30 years) The “I” in “Series I” stands for inflation, meaning, that I Bonds are inflation-protection for your hard-earned army of dollar bills. And, due to inflation, I Bonds have a serious ROI right now! The annualized interest rate is 9.62% when invested for 5 years! You can purchase a Series I Bond right now at treasurydirect.gov and start with as little as $25 and invest up to $10,000 each calendar year. But if you cash them before five years, you lose the previous three months of interest. (For example, if you cash an I bond after 18 months, you get the first 15 months of interest.)
Get into real estate without the headache. (10.6% avg. annual return) If you can’t afford to own an investment property or don’t care to deal with the hassle of flipping homes or the headache of dealing with tenants and toilets, you can still capitalize on real estate gains without actually owning a physical structure. Real Estate Investment Trusts or (REITs) are investments you can purchase just like stocks. Typically, different REITs invest in residential and commercial real estate so you can further dial in your investment by investing in different REITs. This is a great idea if you're looking for those gains without the hassles that come along with being a real estate investor. We call that, winning!
Index Funds and chill. (10.5% avg. annual return) I know it feels tempting to halt investing during a market sell-off. But if I told you that the stock market was 20% off today only (it actually is as of this article), you'd feel much different about scooping up quality index funds at deep value. It feels scary, and the constant negative news cycle makes it feel worse than it actually is. Just remember one of the few themes on Wall Street: buy low, sell high. So if you have a long time horizon, say 10 years or more, and you dollar cost average, then now is a fantastic time to get high-quality, diversified investments like Index Funds which track a market index like the S&P 500 or NASDAQ. This is the traditional approach to investing and offers an incredible value after stocks are beat down in a recession!
All annual interest rates as of July 18th, 2022.
These 5 simple investment options are truly the easiest and safest options to grow your cash during times of inflation and recession. Some folks will advise you to start a business, buy investment properties, and go all in on your side hustle. Those could be good options but to each their own as they can require heavy investment, risk, and involvement. As a normal guy who's had a small business (which I later sold) and had renters for 8 years those "business ventures" require a lot of hand-holding and headaches which you may or may not be down for. If you're truly looking for passive options, the 5 investments listed here are truly the best combination of low risk and high reward while being mostly passive. All are definitely worth considering within your portfolio!
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On the latest episode of The Dave Wallace Show, Dave provides provides 5 simple and low risk ways to invest and grow your cash in a recession. Watch the episode right here!
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