How can you invest during an economic crisis?
Both the Global Financial Crisis and the European debt crisis had a huge impact on the stock markets. A large volume of bad news can lead to unpredictable stock prices movements. Nevertheless, an economic crisis can actually generate opportunities for investors to achieve great results. In this article you can discover how you can actually make a profit from the stock markets during an economic crisis.
In short: 3 methods that can help you to make a profit during a crisis
Churchill once uttered the famous words: “Never let a good crisis go to waste”. It is exactly when the markets are in panic mode that you can achieve great results as an investor. In this article, we discuss three methods with which you can make a profit during a crash.
- Active trading: you can bet on a decreasing stock price.
- Low volatility shares: the prices of these shares barely move, which makes it possible to limit your losses.
- Crisis as an investment opportunity: buy when the share price reaches rock bottom.
There’s a lot of movement during a crisis. The share prices of companies often drop massively. By investing cleverly, you can take advantage of these falling stock prices.
To benefit from decreasing stock prices, you could use a derivative like the CFD. CFDs make it possible to short sell a share. When you short a share, you actually get positive results from falling share prices. Moreover, you can make use of leverage. Through this leverage, you can open a bigger position for a smaller sum of money. You can read more about CFD’s in this article.
It is definitely possible to make money during an economic crisis. Have a look at the graph of the Dow Jones in the time period before the Financial Crisis of 2007-2008. Stock prices went down enormously. If you had opened short positions you could have profited from this.
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By going short, you could’ve made a huge profit.
During a crisis, it can also be wise to invest in low volatility shares. Low volatility stocks are shares that move less strongly. This means that they often barely fall in value during a recession. In some cases the prices of these shares may even be unaffected. Low volatility shares are on the other hand also less exciting. When the stock markets are excelling, these shares barely rise.
But which kinds of company shares have a low level of volatility? These are often companies that provide services or products that are always in demand. An example can be a company active in telecommunication services: even in times of crisis we will still make phone calls. Another example is a company that is active in essential products like food or band-aids.
An example of a relatively stable share during a recession is McDonald’s. During an economic crisis, people have to save up more money. This leads to an increase in customers in fast food chains because of the relatively cheap food. When the economy is recovering, it is the poorest people who are then able again to afford McDonald’s again. Due to these reasons, the economic situation only has a limited influence on the results of the McDonald’s share.
There are even some products that see a rise in demand during a recession. Examples are alcohol or other forms of entertainment. When things are rough, people increasingly look for distractions.
A crisis can also be used as a good investment opportunity, but only when you anticipate that the stock markets will rise due to (potentially temporary) good news. The proverb “after a storm comes a calm” definitely applies to the stock markets too. As you can see in the graph below, the aftermath of the Global Financial Crisis was the ideal moment to buy shares.
Because investors panic, the stock prices fall immensely. However, this drop doesn’t necessarily have to be proportionate to the financial situation within the company. Sometimes the price of a share falls strongly, even though there is not much wrong with the company. It can therefore be wise to look for bargains during a crisis. If you decide to buy shares during a crisis it is important to extensively research the financial figures of a firm.
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How do you handle a crisis as a long-term investor?
As a long-term investor, it is a wise move to collect sufficient cash. When you have many liquid assets at your disposition, you can better profit from the recovering market at a later time.
During an economic crisis, it’s hard to determine how high or low the stock prices will move. That’s why it’s advisable to join in gradually. When you invest a set amount of money monthly, you enter at the low points and at the peaks. This makes it possible to achieve a more stable return.
Long-term investors can hold their shares for a longer period. You’ll still receive your dividend and in the long run there’s a high chance of recovery. By buying more shares during the crisis, you’ll drive the average price down of the shares you buy.
It can be a smart move to invest some extra money in safe havens. The most famous safe haven is an investment in gold. When people are unsure about the future, they often purchase these kinds of safe havens. You can then use the profit you make with your investment in gold to compensate for (temporary) losses.
It is also possible to take out an extra insurance during a crisis. You do have to pay a premium for this. You can take out an insurance by speculating on falling stock prices. This is possible by buying options, for example.
Either way, it’s important to remain calm. Don’t look at your investment results too much. The only way to fail during an economic crisis is by making decisions out of panic.
Gold performs well during an economic crisis
How do you handle an economic crisis as an active investor?
Active investors or traders do not have any trouble with buying and selling shares during a crisis. They do this by regularly trading in the direction of the trend. Do remember that it’s difficult (or sometimes impossible) to predict the low point of a crisis. When you’re on top of this, you may decide to temporarily sell a part of your shares.
A smarter strategy can be to short sell shares. You can do this by making use of CFDs and options. By applying this tactic, you can actually make money from a decreasing stock price.
For active investors, it can also be a good idea to temporarily invest in raw materials like gold and silver. Apart from that, you can also buy the shares of gold and silver mines.
During a recession, it can be wise to buy crisis-resistant stocks. Some shares can resist strong storms. You do have to first study the cause of the crisis. The Internet Bubble, for example, had a different cause compared to the Global Financial Crisis. In the first case, many tech companies were performing poorly, while in the second case, you had to be wary of banks.
Crisis-resistant shares are in any case non-cyclical. This means that the profitability does not depend on the state off the economy. Supermarkets are an example of non-cyclical companies, because people also need to eat during an economic crisis.
Shares that do well during a recession often times have high margins and low levels of debt. It helps when credit ratings are already good and when there are contracts for the long term. This way, a company is reasonably sure that more money will flow in.
Let’s discuss some more crisis-resistant shares.
Unilever is a big and renowned multinational. This defensive stock also performs well during an economic crisis. This is due to the fact that Unilever produces a lot of consumer products that are always necessary. Even during a recession, you don’t want to grow a huge beard. Moreover, the share pays out a fair dividend, which makes it a nice investment choice during a crisis.
Ahold Delhaize is also a strong share that does well during recessions. You can see this, for example, during the corona crisis. People still buy groceries during bad times. Because Ahold makes it possible to purchase them online, they can make a good profit in exceptional situations. Moreover, Ahold Delhaize has a strong market position, which makes this a great investment during a crash.
Another example of a non-cyclical, crisis-resistant share is Admiral Group. Admiral Group is a British insurance company. In times of recession, fewer people hit the road. You can then notice that car insurances perform well above average during an economic crisis. Is the world pessimistic about the future? Then this could turn out to be a great investment.
The passive investment strategy
For people who have limited economical knowledge and who still want to take advantage of an economic crisis, the passive strategy can prove to be a great strategy. The idea is that you invest a set amount of money per week or month into an index fund.
An index fund is a fund that passively follows a basket of investment products. It is important to choose a fund that contains a solid amount of diversification. By periodically investing passively, you join in at both the lowest and highest points. This way, you’ll achieve an average, good yield over a longer time period. There is a lower risk and the results are stable. However, it is true that you lose the opportunity to make huge profits by timing the market well.
When you’re in possession of an investment portfolio with the purpose of achieving price gains in the long run, it is advisable to do nothing for now.
You’ve purchased your stocks in the past because you trust the company. In many situations, the market prices are dropping because the economy is performing poorly. This does not mean the company is performing badly. After an economic crisis, it is actually always the case that there is a rebound, which is why selling is very unwise in this critical time period.
What is a stock market crash?
A stock market crash is a strong drop in the stock markets. During a crash, the majority of the market decreases in value. Investors often panic and try to sell their shares to prevent further losses. A stock market crash often goes hand in hand with an economic crisis.
What is the difference between a crash and a recession?
A crash has a more temporary nature. When you want to profit off of a crash, you have to act fast. A recession or economic crisis lasts longer. The recovery from a recession or economic crisis can take many years.
Should you invest during an economic crisis?
It is precisely during an economic crisis that you should invest! Historical figures show that investors achieve the highest yield during an economic crisis. The more pessimistic the general market, the more options there are available that can help you to achieve great results.
However, you should keep a close eye on the risks. There is always the risk that certain companies don’t survive. That’s why you should ensure sufficient diversification and don’t invest your full capital in one risky share. Especially at the start of an economic crisis, it can be wise to invest in less risky stocks.