The Covid-19 related recession of 2020 was simply two months long, which made it the shortest recession on record. Just like all other recessions, however, it impacted the lives of numerous people. Kavan Choksi Wealth Advisor therefore points out that it is important that people have a good understanding of how to take advantage of a recession and try to grow their wealth even during economic downturns.
Kavan Choksi Wealth Advisor talks about the investment strategy to follow during a recession
Many investors sell off their assets in panic during a recession, ultimately devastating their investment accounts. However, in case they hold on to their investments during downturns, there is a good chance that their assets will recover in time and even increase in value. The very first lesson of recession is that it is always followed by a recovery, which generally includes a strong rebound in the stock market. However, this does not mean that the investors have to sit idle as their portfolios get pummeled by massive selling. They can make use of certain investment strategies that take advantage of recessionary forces to position a portfolio for a swift and strong rebound.
It is not always easy to predict a recession. However, there is a good chance that one would see a sell-off in the stock market well in advance of a recession. If this happens, one must keep in mind that the stock market will usually begin to bottom well before the end of the recession. This would be a good time to take advantage of a declining market through the dollar-cost averaging investing method. Anyone making monthly contributions to a qualified retirement plan would already be using this technique. As the market begins to plunge, one needs to increase their contribution in a non-qualified investment account or start dollar-cost averaging. As a person dollar-cost average their investing, they would gradually lower their overall cost basis on the share price. Ultimately when the price rebounds, the cost basis will often be lower than the price.
As Kavan Choksi Wealth Advisor says, if one plans to hold stocks during a recessionary period, they need to select stocks from well-established, large cap companies with strong cash flows and balance sheets. In comparison to smaller companies with poor cash flows, such companies would be much better suited to weather economic downturns. Moreover, large cap companies are also more likely to pay dividends. These dividends provide a type of a return cushion. Even as the prices of shares go down, one would still receive a return on their investment. This is among the key reasons why dividend stocks tend to outperform non-dividend stocks during market downturns.
Mutual funds or exchange-traded funds (ETFs) invest strictly in dividend-paying companies, and hence purchasing them would be the ideal way to own dividend stocks. Funds that invest in companies with long histories of paying dividends as well as strong track records of increasing those dividends usually tend to generate high current yields and capital appreciation when the stock rebounds.
