Just hearing the word “recession” can make any investor freeze up a little.
When the economy takes a dive – where should you park your capital? Should you pull all of your money out and hunker down? Will any opportunities weather the storm?
As investors, our goal is to make a return on our investment and preserve capital. This can certainly become more difficult in a challenging economic environment like a recession – but it’s possible.
While many investors are inclined to think there’s little money to be made through these times, the reality is that there are many viable opportunities that surface during a downturn.
The Keys to Investing During a Recession
All Recessions Are Different
While most recessions might feel the same in the sense that we tighten our belts as the stock market dips, the economy slows down, and unemployment spikes – the reality is that every recession is different.
What caused the last recession is not going to be what causes the next recession. The economic factors are never the same. The key to successfully navigating investments during a downturn is to understand what’s causing the economic shift.
Understanding the Economic Tides
One of the things we talk about all the time on our podcast is understanding economic tides – the big, long-term economic trends creating opportunities.
Anyone can be a successful investor when the economy is on a tear. After all, a rising tide lifts all boats, right? But if you also want to make money when other boats are sinking and the market isn’t piping hot, you have to understand what’s going on beneath the surface.
Some current examples of these “tides” are the state of supply and demand in housing, the emerging energy crisis, and how stimulus measures during the pandemic affected savings, spending and employment. These will give you insight into what will happen in the economy long term. Check out our 2022 special economic report for a fantastic overview on these trends.
There are always opportunities to profit during a recession if you align yourself with long-term trends that will continue despite headwinds.
“Be fearful when everyone else is greedy. Be greedy when everyone else is fearful.” –Warren Buffett
Have Liquid Reserves
Generally speaking, it’s good to have liquid reserves. Cash is necessary for personal living expenses and opportunities, especially if any surprises come your way. But cash is also important because some of the most significant investing opportunities will happen during a recession. If you have available cash, you can take advantage of those investment opportunities when they arise.
8 Recession-Proof Investment Strategies to Evaluate Opportunities
So if you have capital you’re looking to deploy, but are concerned about recession – what should you be looking for when you’re evaluating investment opportunities?
- Emphasis on current cash flow. It’s not uncommon to find investments that offer a big return. But for most of them, that return is built into the backend – and may not for years into the investment before the business plan is achieved. During a recession, it’s important for investors placing their capital to emphasize investments with existing cash flow. If a real estate investment comes up against renovation obstacles because of a slowing economy or supply chain issues, or leasing the property is slower, cash flow can help weather that storm and continue making debt payments until circumstances shift.
- Multiple exit strategies. It’s important even in the best of economic times to not have your strategy be contingent on one particular outcome. This is even more true during a recession when investments are more susceptible to unforeseen changes. Look for opportunities that include multiple ways to generate a positive return on your investment.
- Overall leverage. When you’re considering an investment, evaluate the underlying capital stack (if you’re unfamiliar with this term, I have a very in-depth article that breaks this down). Deals with lower leverage will have more sustaining power during a recession because they have less debt service requirements. It should be easier to generate cash flow against lower debt payments. Higher leverage deals should be viewed with caution.
- Diversification. Every recession impacts different asset classes differently. Even with a deep understanding of economics and investing, it’s impossible to fully predict what will happen. Diversifying and having exposure to a variety of asset classes will reduce your risk.
- Big allocation in private alternatives. Private alternatives have many benefits, and if you’re diligent in searching for diversification, emphasis on cash flow, and multiple exit strategies, putting a portion of your investment dollars here can be advantageous. The hidden strategy here is that illiquidity, often considered a downside of many private alternatives, can actually be helpful during a recession. The temptation for many investors who do have liquid investments to sell during a recession is high, even though it’s usually a bad time to sell. Lack of liquidity removes the emotional reaction of selling at a bad time and can create better outcomes in the long run.
Three bonus strategies for investing in our particular current economic environment:
- Inflation-protected assets. We believe inflation is going to remain higher for a while, so look for inflation protected assets like multi-family, self-storage, and residential housing; assets that will benefit from higher inflation.
- Energy space. There is also a unique opportunity in the energy space, due to inflation and the brewing global energy crisis. Supply is extremely low, there has been little capital investment over the last decade, and though there’s been a strong effort to transition to ‘green’ energy, we cannot yet meet that demand and still rely heavily on oil and fossil fuels.
- De-globalization. Supply chains have been majorly disrupted both during and post-Covid. The cost to deliver goods is high, driving many companies to bring manufacturing distribution back to the US. This will create additional opportunity in the industrial space, as US companies look to fulfill demand.
If you’d like to learn more about diversifying your portfolio with our funds, get started and schedule a call with investor relations today.
Ben Fraser is the Managing Director and Chief Investment Office of Aspen Funds. Prior to Aspen, Mr. Fraser was a commercial lender at First Business Bank specializing in government backed loan originations (SBA & USDA), for one of the top SBA lenders in the nation. Prior to that he was a commercial credit underwriter for Crossfirst Bank, personally responsible for underwriting over $125MM in C&I and CRE loans across a variety of industries.