14/12/2020 - 09:35

How to invest during a recession

14/12/2020 - 09:35

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No doubt investing during a recession offers an excellent opportunity to build wealth. But the question remains, where to invest and when?

During a global downturn, share values are volatile. Property is just as unpredictable. Yet, if you’ve minimised your risk and built a well-balanced recession-proof portfolio, you’re in a prime position to invest.

Is it a good time to buy a property?

While the cue for people wanting to buy an inner-city penthouse apartment might be non-existent, families looking for affordable housing are lining up.

So, for smart recession-proof investing, add ‘bread and butter properties’ to your real estate portfolio. That is 3 or 4-bedroom homes in a growing area which sell or rent quickly. These types of properties are always in demand from blue-collar workers, thus minimising the investment risk.

Minimise your property risk      

When on the hunt for bread and butter properties, look for homes selling for less than market value in good growth areas. Even better if the property is returning a neutral or positive cash-flow.

Unlike the heady days of negative gearing, a neutral or positive cash-flow (rent return) covers both the principal and interest repayments along with some other outgoings. In the COVID-19 economy, the old school negative gearing tax deductions are not as crucial as creating equity and paying off the property quicker.

Following a building equity investment strategy is a better safeguard should the housing market take another nosedive and force you to make a fast sale.

The investment rule of thumb in COVID-19 times is the more equity you have in a property, the better the buffer should you need to sell at a discounted price.

What if I lose my job?

Conversely, if you lose your job and your investment property has a neutral or positive cash flow, you’ll be in a better position to hold onto it.

You can further safeguard your buffer by:

  • Seeking the right financial advice, and
  • Shopping around for the best low rate interest loans. You’ll save thousands.

Plus, over the long-term (20 years), capital growth will continue to add to your housing portfolio wealth despite the short-term financial fallout from the COVID-19 pandemic.

Growth in house prices post COVID-19

Despite COVID-19 stalling immigration and contributing to the subsequent slowdown in house prices, the housing market will bounce back. Most property analysts expect market growth in mid and late 2022 to accelerate in 2023.

So now is the perfect time to scout for a bread and butter property selling for less than market value and in a potential growth area.

Should I sell shares in a recession?

Typically, financial fear takes hold in a recession — mostly when housing prices stall, and demand appears to be dropping off.

Many start dumping their shares for gold, cash, or low-risk investments. But is this a smart financial move? The answer depends on your circumstances.

Do you need cash?

For those who received a redundancy or severance payout, do your best to avoid selling any shares. Instead, use your payout as a financial buffer. In the meantime, do what you can to build up your emergency cash funds.

Selling your shares when the price falls locks in the loss of capital.

Are you close to retirement?

If you’re close to retirement, your share portfolio is likely to have a sufficient cash buffer to ride out any volatility until the market recovers.

More so, during a recession, it’s the perfect time to re-align your share portfolio by scooping up undervalued investments.

Forty years or younger?

For clients aged forty or younger, I remind them they have another 15 to 20 years in the market. Historically, markets bounce back, and stock prices recover. So where possible, avoid last-minute, panic-driven decisions to sell shares.

Best shares to buy in a recession

Recession or not, the best wealth building comes from a strategic share purchasing plan devised by a proven financial investor.

But if you’re a do-it-yourself investor, the benchmarks for choosing smart shares include:

  • Identifying quality shares trading at a significant discount (undervalued), with a strong balance sheet, good cash flow and paying fair dividends.
  • Diversifying your share choices and asset classes. Like the adage says, ‘Don’t put all your eggs in one basket.’ Consider investing in global companies like Google and Amazon.
  • Think long-term and buy shares with high-dividend yields. Dividend-paying shares allow you to profit in two ways. One, through appreciation of share prices and two, providing a consistent income.

If you’re aiming for a comfortable retirement holding shares with high dividend yield is a must.

Pensioners pay zero tax on share earnings up to $1.6 million plus, they receive a 30% franking credit. That’s hard to beat.

What’s more, many dividend-paying shares are in defensive sectors that can weather economic downturns with reduced volatility.

Stay on track. Stick to your financial plan. Don’t panic because markets always rise and fall. No-one knows for sure what the market will do next but having a plan will allow you to act quickly and seize any investment opportunities with confidence.

Conclusion

In reality, few investments are safe because no-one knows for sure what the markets will do next.
However, if you rise above recession fear sensationalism, good investments are out there if you know where to look.

  • Hunt for bread and butter properties selling for less than market value in growth areas. But importantly, these 3 or 4-bedroom homes must return a neutral or positive cash flow.
  • Purchase undervalued shares paying fair dividends. You’ll benefit from share price appreciation plus added income in the long-term.

Yet, nothing will give you more confidence to act quickly and seize market opportunities in a recession than a strategic investment plan devised by a proven financial planner.

Carbon Wealth Management can help you navigate your way through the various options. Get in touch with us by calling (08) 9446 8588 to get started.

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