The markets are weak and unemployment is rising. Investor confidence is at an all time low. This could lead to an economic recession.
Why are we discussing investing in such a volatile time?
In other words, market weakness is not necessarily a bad thing. If you are patient and willing to wait, it could bring you potential profits.
Before you invest now, however, you should ask yourself a few key questions.
Are you able to afford it?
Before you even consider the recession an investment opportunity, you need to determine if you have the financial resources to do so. This could lead to long-term gains but there are still significant risks.
Also, ensure that you have enough money to cover any losses. You should:
- At least six months worth of emergency savings
- Afford to make your monthly payments and fulfill any other obligations with an income
- These funds can be used to invest for more than five year
What are the market conditions?
Two quarters of negative growth in GDP is considered a recession. Malaysia is still not in recession. We expect some kind of recovery by the end this year. There was positive economic growth prior to the pandemic-induced movements control order.
Stock markets have been affected by the economic uncertainty of the past three months. Although we are not yet in a recession it seems like one is coming soon – which is what is needed to bring stock prices down.
The KLSE Composite Index has fallen to a five year low at the time of writing. This is after recovering from the massive slump that occurred in January 2020. It has been on a downward trend from the middle of 2018 as well.
Forbes actually believes that the US is about 4.5 years late for a recession in 2018. History has proven that when the United States experiences economic difficulties, so do all other countries.
It doesn’t bode well for the global economy in the short-term.
The four stages of the economic cycle are expansion, peak and contraction.
When the economy expands and employment increases, this is called expansion. Peak is when all economic output is at its peak and prices are rising. As the market corrects itself, this causes a contraction. The trough, which is the lowest level possible of contraction, signals that the economy has begun the cycle again.
The tendency to rise again is that what goes down tends to go up again. The economy in general is generally stable. Individual investments may have a different track record.
Investors who can afford it should look at market downturns and market dips going on for sale. This is a great opportunity to make long-term investments.
This is why Warren Buffet’s famous quote, “Be fearful when others have greed and greedy when other people are afraid”, was so popular. An economy at its peak is one that has a greedy market. This drives up prices and is a sign of a strong economy. Fearful investors, on the other hand are indicators that stock prices are falling.
If the economy is recovering, it might be a smart move for the brave investor that he or she invests in industries that can withstand the downturn and then ride out the turmoil into expansion.
This is the right thing for you?
It is difficult to invest during a recession, especially if your portfolio is constantly being re-evaluated. It is impossible to predict when an economic recession will end. There is no way to know if you are in the trough or not.
Your blood pressure will not be affected if your investments shrink while you wait for the recession to end.
These economic cycles last about 10 years. Malaysia was hit with financial crises in 2008 and 1997. The current downturn started in 2019. This cycle is a reminder that you can prepare for the next peak of the economic cycle by preparing now.
Important to remember is that the next trough will not be as low overall as the previous one. As long as you are focused on the long-term, you will still be ahead. Prepare to do your research on the industries that are likely to recover quickly and to hold the investment for many decades.