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How To Invest During A Recession

You might be in two minds about buying shares, but don’t let a bear market hold you back, writes Kristen Lunman of Hatch.

19 October 2021

Winter 2020

The coronavirus outbreak sent share prices from New Zealand to New York tumbling, sparking a wild ride over the two months or so, and a bear market.

If you’re not familiar with the term ‘bear market’, it refers to instances when there’s a share market decline of 20 per cent or more from recent highs.

A bear market and a recession can be a challenging environment for investors – but it can also present good opportunities for some.

If your income or job stability hasn’t been affected by the Covid-19 outbreak and you’ve got spare money at your disposal, you may be keen to take advantage of the opportunity.

Even the most cool-headed may wince at market dips, but eventually could be on the hunt for quality deals.

From bargain-hunting to keeping calm, here are some tips to consider whether you’re an old hand or a newbie keen to dip your toes in a bear market.

1. Invest in what you know and understand

The investing principles of diversification, or spreading your risk over a number of asset classes, and a long-term view still apply in a bear market. So, it’s important to do your research.

A good place to start when you’re investing in shares is in a company that you know. Think about the brands you buy, or a product that everybody loves.

While there are no guarantees with share-picking, if you love a brand and your friends or colleagues do too, then there’s every chance the company behind it is successful – or has the potential to be.

When you buy shares, you’re buying a personal stake in that company, so you’re essentially backing the future of that company.

It’s a good idea to monitor company and earnings announcements. Also, keep an eye out for interviews with key people in the business.

2. Invest in quality companies when they’re on sale

If you’re a long-term investor confident in the strength and potential growth of the companies you invest in, you’ll tend to look at share price drops as a ‘sale’.

By a sale, I mean there’s a chance to buy shares you believe in at a discounted price. ]Sometimes, it’s called ‘buying the dip’ because investors are on the lookout for good quality shares that are trading at a discount.

It’s important to differentiate between companies that have seen their share price fall as a result of everything being dragged down in market panic, and those that have dropped because they’re on shaky ground heading into a recession.

To thrive on the other side of a dip, it’s a good idea to invest in high-quality companies that have strong balance sheets, low debts, and cash on hand.

Corrections, bear markets and recessions will come and go, but great businesses are resilient.

3. Consider dollar-cost averaging

Investing the same amount of money at regular intervals (like each time you get paid) – weekly, fortnightly, or monthly – is called dollar-cost averaging.

That way, you won’t be tempted to give in to your emotions when the markets dip or surge.

When you commit to contributing regularly, you won’t even have to look at what prices the shares are. Dollar-cost averaging is particularly powerful in a bear market, because you are usually buying more shares for less money, compared to recent market highs.

It’s a way to balance out your risk.

4. Look to the future

It’s hard to know how long a bear market will last, and currently, we just don’t know how long the Covid-19 crisis will go on for, or how much it’ll hurt the global economy.

So, as a general rule, don’t invest in a bear market with the hopes of getting rich quick.

Instead, take a long-term approach to investing, known as ‘buy and hold’, and assume that any shares you buy now are with companies that you’ll continue to back for many years to come.

5. Get off the sidelines

Start by doing something small today.

Watchlist the brands you love or exchange-traded funds (ETFs) in sectors you’re familiar with, and when you’re ready to invest, you can begin with a small amount and then build your confidence as you go.

This article contains general information only and is not personalised advice. Before investing in any financial product, seek independent financial advice.

Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.

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