If you ask the average investor about their memories of the 2008 financial crisis and the recession it spawned, there’s a good chance the stories they tell will be unpleasant. After all, the steep decline of the stock market cost investors a stunning $8 trillion in wealth in a mere 18 months. The event left scars that still haven’t fully healed.
Now, with the coronavirus roiling markets and disrupting economies around the world, nervous investors fear that the recent losses in the stock market are just a preview of what’s to come. Analysts are already making breathless comparisons between today’s crisis and the Great Depression, and as hyperbolic as that may sound, the predictions may not be far off.
In response to the crisis, investors are scrambling for ways to recession-proof their holdings to the greatest extent possible. To help them to do it, here’s a look at three kinds of assets that should be able to weather the coming economic storm.
1. Real Estate and REITs
In 2008, when investors last sought refuge from an economic storm, they were deprived of the option of an asset class that has long been the go-to in down years: real estate. That’s because the 2008 financial crisis was caused in large part to a collapse in the housing market, taking property values down even faster than the stock market’s precipitous fall.
This time around, though, investors don’t have that problem. That means it’s a great time to go big on real estate investments. Investors with the means should start to look for opportunities to purchase property at a significant discount, driven by the current owners’ need to increase their liquidity. The good news is that there’s already evidence that suggests property prices are holding out against the economic tide, proving the validity of the strategy. The same holds true for specific types of REITs, which own properties that aren’t heavy in the retail sector.
As the 2008 financial crisis worsened, a whole new financial instrument made its debut. Designed as a response to the widespread view that fiat currencies couldn’t be trusted in an age of financial fraud and manipulation, Bitcoin aimed to provide a viable alternative for investors to choose. In the years since, countless other cryptocurrencies and cryptocurrency exchanges have sprung up, creating a parallel global financial system that’s largely unmoored from nation-state governance.
The big question that remained, however, is how cryptocurrencies would fare during the next inevitable recession. If the early returns are any indication, the answer is that they’re faring quite well. If nothing else, the major cryptocurrencies have outperformed the stock market by significant margins throughout the crisis so far, minimizing losses for owners. When you consider that their value isn’t directly correlated with any nation’s economic performance and that they may even thrive in times of economic uncertainty, it’s clear that cryptocurrencies have taken their place as a hedge of choice for anxious investors.
3. Precious Metals
Although it’s not new advice to tell investors to consider precious metals when the global economy hits a rough patch, there’s a much more compelling reason to do so this time compared to past recessions. It’s the fact that today, for the first time, governments around the world (including in the US) are staging dramatic monetary interventions to blunt the effects of the coronavirus shutdowns. In the short term, that’s good news. It gets money into the hands of the people who need it most, right when they’re almost guaranteed to spend it.
The trouble is, all of that interventionism is adding trillions of dollars of new debt to the ledgers of several nations. Although it won’t happen overnight, the enormity of that bill is all but certain to take its toll in the form of massive currency devaluation. And this time around, even countries like the US may not be able to escape the debt-crisis trap. All of that adds up to one inescapable conclusion: it’s a great time to invest in precious metals like gold and silver as a hedge against such a disaster-in-waiting.
The Bottom Line
Although no one yet knows how deep the coronavirus-induced recession will be, nor how long it will take to recover, one thing is clear. It’s that we’re heading for another painful period for investors that they’re not going to want to remember years down the road. The only good news is that unlike the last recession, this one is providing some lead time to make changes in preparation for the worst of it. And just like the illness that’s causing the trouble, that heed the warnings will be fine in the end. And those that don’t won’t like the outcome.