4 Types of Assets to Buy to Survive a Recession
A recession is an economic period during which the economic growth of a country or region is negative.
It means that the companies of that country/region produced less than they did the previous six months.
When a recession hits, many companies that were barely surviving go bankrupt; the companies that were doing well often let off people; and the companies that were doing super well freeze hiring.
Since everyone is earning less money, everyone spends less.
As a result, asset prices go down. The stock market often crashes. And any bubble that had been building up explodes.
An economic bubble is a situation in which the price of an asset is vastly inflated compared to its real value, or to its demand.
Eg: the NFT craze of summer 2021 during which pieces of digital art were being sold for millions, was a bubble.
When the purchasers of these NFTs tried to sell their possession 9 months later, prices had tumbled by up to 99%.
Notice that the signs of the upcoming recession had appeared by the time NFTs owners were trying to sell.
Spending millions to acquire an image may, in economic hardship, not be such a good idea, so the market plummeted.
To quote Warren Buffett:
It’s when the tide goes out that we see who has been swimming naked.
You don’t say!
Timing
Buying assets to protect yourself in a recession isn’t so much about what to buy, but when.
And that depends on the market.
Markets can stay irrational longer than you can stay solvent.
The above quote by the economist Keynes highlights how markets don’t necessarily react according to the real economic situation.
Sometimes, it takes a bit more time.
Remember that the financial crisis of 2008 in fact started in February 2007.
It took 20 months for Lehman Brothers to go bankrupt and the stock market to crash. However, many knew already for months before that the bank was unlikely to survive and that the whole real estate market would collapse.
It means that it’s not because the stock market goes up that the situation has gotten better.
The idea that “markets are efficient” is only valid in theory.
If we’re headed for a recession (and we are), the stock market will eventually crash as it always did.
The question is when.
This means that you should start to invest after the market has crashed, not before.
It’s when assets are for sale for a discount that it’s the best time to buy.
Buy low, sell high.
So make sure you have a budget to buy when the crash inevitably happens.
Investors that invest all of their money in assets end up having nothing when stocks are at a huge discount. As a result, they can’t buy anything and lose a lot of money due to the opportunity cost.
Smart investors, on the other hand, keep their capital for a “good occasion” so they can ride the way back to new all-time highs once the market bottomed.
This explains why the best investors and hedge-fund managers sit on a pile of cash, seemingly waiting, when the stock market is at an all-time high.
Sell when it’s high. Buy when it’s low.
Let’s now have a look at which assets keep on increasing, or don’t decline as much, during a recession.
1. Collection Pieces for High Net Worth Individuals
The philosopher and mathematician Nassim Taleb once highlighted how industries that targeted the ultra-rich were highly profitable because they sold to people that always had a lot of money regardless of the economic conditions.
If you manufacture cars for millions or bags for thousands, your customers are rich enough to acquire them at any time.
It is therefore no wonder that luxury brands minted so many billionaires (Bernard Arnaut with LVMH, François Pinault with Kering, the Wertheimer family with Chanel, Johann Rupert with Richemont, etc).
Items such as art, fine wine, watches, cars, and designer clothes are reasonably recession-proof.
Of course, we should avoid generalizations as not all brands are equal. Certain companies benefit from a certain reputation in their industry that other competitors don’t enjoy.
But overall, these industries are seldom disturbed by a recession, or at least, not as much as the average.
2. Stocks
Certain stocks can be said to be recession-proof (they will keep on increasing) while others are recession-resistant (companies won’t lose money).
Alcohol, cigarettes, and cosmetics, for example, are recession-proof. Sales of each of these products increase during a recession.
Stocks like grocery stores, food and consumer staples, and utilities are recession-resistant.
These companies keep on being profitable but they don’t necessarily increase sales.
As a reminder, buy these stocks after the market crashed, not before.
3. Real Estate
Retail consumers spend the majority of their monthly salary in three sectors of the economy.
- Food
- Transportation
- Rent/mortgages
This is due to the fact that regardless of the state of the economy, people have to eat, move, and live somewhere.
Real estate is therefore an interesting asset to buy and rent out as it ensures an almost guaranteed monthly revenue.
But there are caveats. Not all real estate is the same. Not all real estate is recession-proof.
Broadly, avoid investing in real estate where a bubble has built up.
Signs to look for are news headlines such as “no one can afford a house at the moment”. It means the prices are too high and that the bubble burst is imminent.
Furthermore, recessions usually shrink the value of the residential real estate market because people buy less of it, so prices go down.
When it comes to commercial real estate, there are a few trends to watch out for.
The first one is remote work. Remote work means fewer people in offices, hence fewer square meters needed.
The second one is layoffs. When companies lay off 10% or more of their workforce, they also downsize their real estate surface.
Industrial real estate like healthcare facilities, data centres, and warehouses are less affected by recessions because they remain productive at all times.
You can invest in them through REITs available at your bank or from stockbrokers.
4. Farmland
Farmland is the last recession-proof asset on our list, and one of the best ones.
Similarily to real estate, farmland produces food that people need to eat regardless of the economic conditions.
The demand for food increases with the number of people that live on earth. As this number is constantly increasing, the need for farmland is constantly increasing as well.
Finally, the constant development of new farming techniques helps farmland produce more food which increases its value as well.
Conclusion
A recession helps investors see which businesses are resistant and which aren’t.
As a result, investing for a recession happens before a recession happens.
When you focus on profitable businesses and assets that deliver actual value to consumers and make products and services that are needed no matter what happens, you drastically increase your chances to limit the damages to your portfolio.
It all comes down to investing in the right type of assets with good fundamentals, such as farmland, one of the oldest assets in the world!
Meanwhile, you should always keep some cash on the side so you can buy assets at discounts when a stock market crash eventually happens.
Interested to invest in farmland?
Go to landex.ai today and begin your land investment journey!
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