With the U.S. market teetering on the edge of recession, investors may want to re-evaluate their investment strategies to cover themselves in case the potential recession becomes reality. Accounting for recession can require some adjustment of financial plans. To that end, NuWire has compiled a list of the top five recession investments.
1. Precious metals
Precious metals, such as gold, silver and platinum, are a tried and true investment for those looking to get out of the stock market. Many currencies were tied to precious metals in the past, which solidified their place as a currency hedge. Gold, silver and platinum, while they correlate somewhat to each other and the stock market, do not correlate absolutely, which makes ownership of each precious metal a good diversification option.
The growing demand for silver from the industrial sector has been helping edge up the metal’s price. Platinum, with its extremely limited supply and steady demand from the automobile sector, has also seen dramatic increases lately.
Gold has also been on the rise in recent months as many investors are beginning to fear inflationary pressure and financial turmoil in the markets.
“Gold has served as a universal monetary substance in all civilizations because gold is one of the few common values that has united mankind throughout the millennia, transcending race, religion and geography—significant in light of today’s emerging global economy,” Craig R. Smith, CEO of Swiss America and author of Rediscovering Gold and Black Gold Stranglehold, said.
Investors should be aware that all precious metals are volatile investments, subject to market swings based on small events such as a single large seller getting out of the market, mining strikes in developing countries—particularly with platinum—or other nuances that may affect supply. Still, precious metals remain an excellent tool for portfolio diversification and a currency hedge.
Investors interested in precious metals have a number of ways to invest, including physical precious metals, mining stocks, precious metals CDs, exchange-traded funds and futures or derivatives. Not all of these investment avenues are available for each precious metal. For more information about investing in precious metals, please see The Gold Standard, A Silver Lining in an Unstable Market, Platinum: A Metal Investment Fit for a King and Investing in Gold and Silver CDs.
Timber is a solid commodity with steady demand that does well during stock market declines because it is not correlated to the market. Its returns reliably outperform the market, and its value increases over time, even without investor input.
Adam Nash, a timber investor, said owning and harvesting timberland is essentially a classic fixed-income investment. The land acts like principal, he said, and the timber acts like a perpetual dividend.
Timber has consistently and significantly outperformed the S&P since 1987, according to the National Council of Real Estate Investment Fiduciaries (NCREIF). In the past 20 years, the timber index has produced average annual returns of more than 15 percent, compared with less than 12 percent for the S&P.
“[Timber] brings a stabilizing influence to a portfolio and indeed log prices have historically increased around 2 percent in real terms over and above inflation,” Richard Bourne, marketing manager for Roger Dickie New Zealand Ltd., said. “So this means that timber investments can protect investors’ capital as well as provide significant returns on investment.”
Investing in timber can be done in several different ways. Investors can purchase land directly or look into publicly-traded companies, including real estate investment trusts (REITs) and timber investment management organizations (TIMOs). Investors can also buy fractionalized timber investments in foreign countries, including New Zealand and Panama, fairly inexpensively. For more information about these investment types, read some of our previous articles Timber: A Renewable Resource, New Zealand Forests and Timber Investments in Panama.
3. Foreign currencies
As the U.S. economy weakens and the dollar continues to lose value, it makes sense for investors to consider owning blocks of foreign currency. “Currencies have different pricing mechanisms, and low correlation to other dollar based assets, therefore providing an excellent diversification tool, and hedge against a falling dollar,” Chuck Butler, president of the EverBank World Markets, said.
The euro and various Asian currencies could be wise choices for investors looking to diversify into other currencies. The euro is liquid and many Asian currencies have been kept undervalued in order to boost their countries’ economies.
The euro and various Asian currencies could be wise choices for diversification| alt=|Japanese Yen and Chinese Yuan|]“From the point of view of the global investor, foreign currencies are very attractive,” Richard Olsen, founder of Olsen Limited, a Zurich-based e-finance technology and service provider, and one of the founders of OANDA FX Trade, a retail foreign exchange dealer, said. “They offer diversification because individual currencies tend to have low correlation among themselves, and currencies in general have low correlation with other asset classes.”
There are several ways to diversify into foreign currencies, including the forex investment market. For more information, see our article on the Forex Investment Market.
Because many investors shy away from the risk prevalent in directly trading currencies, some institutions have developed ways for investors to diversify into other markets without risk to their principal.
Foreign currency CDs can offer investors a potentially safer way to participate in the currency market with principal guarantees. For more information about foreign currency CDs, please see Foreign Currency CDs Offer Diversification.
4. Equities in countries with low correlation to the U.S.
Investments in foreign countries whose economies aren’t tied to the U.S. economy could be helpful for investors hoping to diversify their portfolios in case of recession.
“What’s different now is that the dollar’s decline looks less and less like a ‘slump’ and more and more like a secular re-positioning,” Olsen said. “As this story unfolds and more U.S. investors take it seriously, we think more of them than ever before will take a global approach to portfolio construction and asset allocation.”
The Asian and Oceanic markets are the least correlated to the U.S. stock market globally, according to Birinyi Associates. The Hong Kong-based Hang Seng Index and Australia both have low correlation indices, according to Birinyi Associates.
To get involved in foreign equities, some investors may want to get involved in foreign stock exchanges. E*Trade now allows U.S. investors to buy and sell stocks from certain foreign exchanges online. For more about E*Trade, see E*Trade for Foreign Stocks.
5. Real estate
Real estate can be a prime investment in times of recession. In times of financial uncertainty, real estate investors should focus on cash flow rather than appreciation. Cash flow is easy to see—the numbers either work from the start or they don’t.
Rental properties with good cash flow can be found in a number of areas across the country. For more information on areas with good rental cash flow, please see Top 10 Cash Flow Real Estate Markets.
Creative investors who are looking for cash flow may also want to investigate mobile home parks. For information on mobile home park investing, please see Mobile Home Park Investment Boom? and Why Invest in Mobile Home Parks?