How to make money in or during a recession

According to some economic and financial experts, there is a strong possibility that we are heading for a recession here in the UK. A recent survey carried out by Bloomberg News reported that four out of every five economists are expecting this to happen sometime in 2023 or 2024.

Recessions are, of course, difficult times, but they also present a chance to build personal wealth by:

• Investing as much as you can
• Protecting your income
• Rationalising expenses

This Moneyfarm guide will indicate ways on how to make money in a recession, but before we get any further into that discussion, let’s first look at the things you shouldn’t be doing during economic downturns.

What not to do during a recession

The economic cycle is one of the periods of relative stability and modest growth, downturns, and upturns. But before you think about adjusting or implementing a strategy based on the current stage of an economic cycle, good financial planning is essential, particularly before you dive in and begin to consider how to make money during a recession.

The place to start is by creating a budget. During that process, you will review your expenditure, and this gives you the opportunity to cut out any unnecessary or frivolous purchases, including minimising credit card debt.

Once you’ve rationalised your expenditure, you can get on with financial planning. Not only is this the first step in how to make money out of a recession, but it’s also good practice anyway.

How do you survive a recession?

Investing is not for everyone, particularly those who are averse to taking any risk. During challenging times, if you’re unwilling to take risks, the key to surviving a recession is to reduce unnecessary expenses to minimise living expenses, consider selling belongings, or start a side hustle to supplement your income.

If you are prepared to take a degree of risk, then you should consider adopting an investment strategy based on your investor profile.

Ways to make money during a recession

There are a number of definitions for recession. One definition of an economy in recession is when there are two consecutive quarters of negative GDP growth. This one would have seen the US economy in a recession starting in the summer of 2022. Other definitions would argue there is no current recession.

So far, despite warnings to the contrary, recession in the UK has been narrowly avoided. Considering the Bank of England’s predictions of reduced inflation not aligning with the current high inflation levels, there remains a possibility of an impending recession. It means that the question of how to protect money from a recession is still very much valid.

Potential ways how to make money from a recession include doing things like considering various investment accounts, including:

• Cash ISAs
• Stocks and Shares ISAs
• SIPPs
• General Investment Accounts

It brings us nicely to the next question…….

What is the best investment during a recession?

For some people, the best investment during a recession is something that is recession-proof and, therefore, safe. When it comes to how to make money in a recession with recession-proof investments, there are several options you can consider, but It’s important to note that no investment is completely immune to economic downturns.

However, certain types of investments tend to be more resilient during challenging economic times. Here are a few investment options to consider:

Blue-chip stocks

Blue-chip stocks are types of shares issued by large, well-established companies with a history of producing stable earnings and dividends. These companies usually have strong stock market positions and are able to withstand economic downturns more comfortably than their smaller counterparts.

Bonds and Treasury securities

High-quality bonds, and government bonds, in particular, are considered relatively safe investments in times of recession. The US government backs Treasury bonds, and GILTs are typically considered low risk investments. During recessions, investors often look to the safety of bonds, pushing their prices up and their yields down.

Defensive sectors

Certain sectors of the economy can be more resilient during economic downturns. They include healthcare, consumer staples (e.g., food, beverages, household products), utilities, and essential services. Companies operating in these sectors continue providing products and services that people continue to need, even when times are tough.

Real estate investment trusts (REITs)

REITs are businesses that own and operate real estate that generates income. They generate steady sources of income through rent collection and may provide a level of stability as part of a diverse investment portfolio.

Some types of real estate, like commercial properties, can be more vulnerable during a recession. In contrast, certain REITs focused on residential properties or essential services might be more resilient and can be one of the ways on how to make money in real estate during a recession.

Diversification and asset allocation

Diversifying your investments across various asset classes, like stocks, bonds, real estate, and commodities, can help mitigate the effects of a recession. Diversification means less exposure to any single investment and can help smooth out volatility. But maintaining an appropriate asset allocation according to your risk tolerance and investment goals is essential to ensure a balanced and recession-resistant portfolio.

Is gold a beneficial investment in a recession?

If you want to know how to make money in a recession and rich, gold may not be the best way to go. Still, it is often considered a fairly safe investment during economic downturns and periods of uncertainty. Here are a few reasons why gold is often considered a good investment in a recession:

A Safe Haven Asset

In times of economic uncertainty or market volatility, investors often seek safe haven assets that are predicted to hold their value or even appreciate. Gold is often considered a safe haven because it’s been used as a form of currency and a holder of value for centuries.

A Hedge Against Inflation

Recessions are often accompanied by inflationary pressures, as central banks implement measures to try to stimulate the economy. Gold is seen as a hedge against inflation as its value has a tendency to rise as prices go up. As the purchasing power of fiat currencies erodes, gold can act as a wealth preserver, but as a way of how to get rich in recession? Not really.

As part of a Diversified Portfolio

As part of an investment portfolio, gold can provide diversification benefits. It often has a low or negative correlation with other assets like stocks and bonds. During recessions, when traditional financial markets experience significant declines, gold’s performance might not be as closely tied to those economic conditions.

Gold has demonstrated it can maintain and even gain in value during economic downturns, so investing in it can be a good idea; however, it’s important to understand that it, too, is not without risks. Various factors, including supply and demand dynamics, geopolitical events, and changes in interest rates, can influence the price of gold.

Is cash good in a recession?

Some investors have a “cash is king” philosophy during a recession. For them, it describes the benefits of having liquid assets on hand when the economy downturns. It is true that holding cash can provide relative stability compared to the potential rapid decline in the value of shares. But, having said that, relying too much on cash can negatively impact your ability to achieve long-term investment goals.

How to get rich during a recession

There is no guaranteed way on how to make money in a recession and become rich. However, you could take advantage of low stock prices. Stock markets invariably recover when recessions end, and if you bought in when prices were at their lowest, you would gain when the prices go back up.

How long do recessions last?

The length of a recession depends on various factors, including the base causes of the downturn, the effectiveness of policy responses, and the overall economic climate. Some recessions are relatively short-lived, lasting only a few months or perhaps just a couple of quarters. These are referred to as “shallow” recessions. But recessions can also be more prolonged, lasting several quarters or even years. These are called “deep” recessions.

The severity and length of a recession are influenced by factors such as the size of the initial economic shock, the resilience of the financial system, the effectiveness of financial policies enacted by governments and central banks, and other factors such as worldwide economic conditions and geopolitical events.

Economic cycles are a natural part of the business cycle, and periods of expansion and contraction alternate over time. Recessions can be challenging, but economies have historically shown resilience and eventually recover from downturns, to be then followed by periods of economic growth.

How to build wealth during a recession with stocks and shares ISAs

Opening a stocks and shares ISA is one possible answer to the question of how to make money in a recession, but you need to be prepared to invest long-term. In an effort to bring inflation down, the BoE may continue to increase interest rates, which should be beneficial for all savers and investors.

A stocks and shares ISA might be a good idea, both in terms of passive investing and getting an income from dividends stock payments. However, there is always a risk that the value of any investment can drop as well as rise, which is why being prepared to invest long-term is advisable. It means you will be more prepared to wait for the prices of stocks and shares to recover, as they invariably do.

If in doubt, it’s a good idea to seek financial advice or guidance – either or, as they are pretty much the same thing as you will see if you check out the Moneyfarm article entitled Financial advice vs guidance, is there a difference?

FAQ

Can investing in real estate be profitable during a recession?   

Investing in real estate during a recession can be lucrative, especially if you find discounted properties or invest in stable rental markets. However, thorough research and analysis are crucial before making investment decisions.

What should I consider before investing in a recession?

As an investor looking to invest during a recession, you should consider several factors, such as the overall economic climate, market trends, the financial health of potential investments, and your own risk tolerance and investment goals.

Is it advisable to time the market during a recession?   

It is almost impossible to predict with certainty when the market will go up or down. Timing the market is challenging even in normal circumstances, and attempting to do so during a recession can be even riskier. Instead, focus on long-term investing and asset allocation strategies.