What to Invest In During Recession: Stocks or Real Estate?
A global recession is one of the most interesting, yet confusing times to invest. More than any other time, a looming recession means your investment choices would have to be sharp and smart, if gains are to be made.
It is a common question whether real estate or stock is the best investment tool. Investing in the stock market is often extremely tricky during a recession, as there has been significant deflation of stock although it is expected that stock prices will gradually rise post-recession. On the other end of the spectrum, if you abhor volatility, you might be wondering if real estate is as recession-proof as it is often touted to be.
What Should You Invest In: Stocks or Real Estate?
While recession time is associated with deflation of stock and sometimes real estate values, this doesn't mean that you can’t invest smartly during the recession.
Investing smartly means comparing the pros and cons of investment options in terms of risk tolerance and potential for gains, and finally choosing the best one for you. Hence, investing in either stocks or real estate could be good or bad for you depending on these factors.
Stocks: A High-Volatile Option For The Investor With High-Risk Tolerance
The stock market brims with opportunities for the highly sophisticated investor, due to the panic mass-selling that is common in a recession. For this to generate massive returns for you, you need to have a proper understanding of how the stock market works.
In a bear market when the prices of stocks are expected to hit rock-bottom, you can buy inverse ETFs which track underlying indices made up of stocks, bonds or commodities. As the price of the underlying stocks go down, the inverse ETFs increase in value. It is even more impressive to invest in leveraged inverse ETFs, as you can make a return of two to three times the index’s price change! Non-leveraged inverse ETFs do not offer you this benefit. Although there are additional risks attached to ETFs such as increased volatility, it has a liquidity advantage over real estate- which means you can sell it whenever you want without needing any form of maintenance.
The key skill required in trading stocks is an uncanny knowledge of timing, so you know the precise time to sell or buy that would earn you maximal returns. An even the most experienced investor may make mistakes in determining when the market reaches its bottom. However, investing in equities remains a smart investment option for the sophisticated investor with a high-risk tolerance.
Real Estate: A Low-Volatile Option for the Investor With Low-Risk Tolerance
As the market bottoms out, the investor with a low-risk option can go for an option that has low volatility and is often thought to be recession-proof: Real Estate.
A notable advantage of real investment over most stocks is that it is a leveraged investment instrument. This is because if your lender is confident in your ability to repay, you are able to borrow most of the property value as a mortgage.
If you want to take less risk, you should invest in high demand areas where prices are decreased in this period, as the prices will become higher once the economy stabilizes. Many consider rental properties an excellent investment tool, since if there is enough demand in the neighborhood, you always can find good tenants that their monthly rental fees would cover most or all of the property mortgage costs. However, if you are not a risk-averse investor and want to get a higher return, you may buy a property in the areas that hit hard during the recession and the prices dropped significantly. It might take a long time for these areas to recover but when it happens the returns will be significant.
Since real estate has a higher lag period compared to the stock market, it will take more time for it to hit rock-bottom, so you’d have to be patient until closer to the middle or end of the recession.
Should you invest in the stock market or real estate? The answer is that you can choose either option depending on your risk tolerance level, volatility index and timing of the investment. If you are a highly sophisticated investor with high risk tolerance, investing in the stock market via inverse ETFs is an excellent option for a period of recession. However, if your risk appetite is quite low, you can invest in real estate in a high-demand area where home prices will go up post-recession. Real estate takes much longer to bottom out- unlike stocks, so you might have to monitor the market to know the best time to make a good bargain.