How to Invest in a Recession

If you have money to invest in a recession, then consider yourself lucky as you are better off than most. This, of course, is taking for granted that you have no outstanding debts and you have an emergency fund at your disposal that can cushion you for unexpected expenses or the loss of a steady income (such as from a job).

Now that the disclaimers are out of the way and if you still wish to invest in a recession, please read on!

There is such a thing as fast easy money but the greater the reward the higher the risks. In a recession, an investor can short sell - selling a financial instrument he does not hold but hoping to buy it back at a later date at a lower price. Seeing as the markets are in a general downtrend, this would make a lot of sense. However, due to market turmoil, nothing is ever predictable. With the U.S. government pouring in billions of dollars in economic stimulus, one never knows if Wall Street or Main Street will view this as a positive sign; buying back the financial instrument at a lower price is not possible. In fact, you would be losing money by short covering in buying it back at a higher price.

The traditional approach to investing is to be long in a security. This means that the holder of the security makes a profit if the price of the underlying security goes up. However, this begs the question, how long to hold the security? You can hold a security for years, a day, a few minutes and still be considered long.

In answer to this question, we can take inspiration from one of the most renowned investors in the world - Warren Buffett. His advice is to hold the security forever. Given his track record of success as consistently being in the top positions of Forbes' World's Richest list, his advice should indeed be considered.

Buffett looks at investing as if he's an owner in the company. And technically, if you have shares, you are a partial owner. The question begs to be asked, why invest in a company if you don't believe in it for the long term? That's like getting married but knowing you will get a divorce in a couple of years. Why not just find good companies to invest with the criteria being that they will continue to dominate its competitors over the next ten years? Furthermore, in times of recession when everyone is in a panic, this is the best time to take advantage of cheap stocks that are trading below their fair value. After all, to accumulate wealth, everyone knows to buy low and sell high.