Although difficult to predict, recessions are an all too common feature in our economic model. While we may not be able to predict a recession in advance, what is the best way to invest when you find yourself in a recession?
During a recession, capital flows less freely and is more restricted than in bull markets. As such, fewer people find themselves in a position to take risks and invest in more speculative assets.
For most people, low-cost index funds and ETFs remain the best way to invest during a recession. However, recessions always cause significant compression in the valuations of high-risk assets.
As a result, investors can purchase these assets at a discount. For this reason, many investors love the opportunities that a recession presents them as it allows them to invest their capital into high-growth opportunity assets at a fraction of their previous valuation.
While the risk profile of each approach is different, it is difficult to determine which approach is optimal for every individual as it will depend on their specific psychology and circumstances.
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