In this article we are discussing two main investment strategies which are usually followed by investors in recession or correction or bear market like situation.
1. Equity Mutual Funds
In this strategy, instead of trying to invest in individual stocks (even if they are available at a bargain), investors can opt to invest through mutual funds. When stock markets recover from a bear phase, the recovery is usually broad-based (several stocks go up together). Investing in a diversified mutual fund is preferable as investors can benefit from such broad-based recovery, rather than betting on a select few stocks. The return from this strategy would be less than that from some of the best-performing stocks at the top of the returns table. However, the risk is also lower than associated with investing in poor stocks that are unable to recover even if the rest of the market does.
2. Direct stocks
This strategy is suitable for only those investors with adequate knowledge of how the stock market operates and what causes price movements. It is also suitable for investors with greater risk appetite or the ability to absorb losses without financial distress. Such investors are also aware that certain sectors are more resilient than others in a bear market. For example, companies from sectors like consumer, pharma, and healthcare are more resilient due to the nature of demand for these goods and services. Thus, knowledgeable investors avoid cyclical sectors such as real estate where the turnaround period can be long, spanning several years.
More knowledgeable investors who conduct in-depth research on companies are better positioned to pick individual stocks for investment. One such filter for companies is a proven track record of recording growth even through a recession.
Overall, recessions are opportunities for long-term investors to participate in the stock market at bargain prices. However, the time horizon in such investment should be long term, and investors need to have a sound strategy that suits their investment style and knowledge of the stock market.