Special series - how to survive a recession, part 3

Special series - how to survive a recession, part 3

Welcome back to my series on how to survive a recession here on my Ideas on how to become rich site. In the first post here on my site I wrote about the orgins of the 2008 financial crisis, which can be seen to have had long rooted causes and goes back many years. In the second post here on my site I wrote about the various past depressions (a depression is a longer and more series recession) and also on several key terms and key terminology for the current economic and financial crisis.

You can conveniently and quickly view the articles that I wrote earlier quickly using these convenient links here:

Special series - how to survive a recession, part 1
Special series - how to survive a recession, part 2

In this post, I will be writing about the various assets that you can put your money in - that is to say, while the world/ your local economy/ your regional economy is in recession, what should you do with your money? Basically I am asking the question "how do I survive a recession" and answering it with another further and related question: "where do I put my money during a recession and how do I survive it without losing any more of my funds?"

From the Straits Times, here are the 10 safest to most dangerous investments you can make - financial instruments that you may want to consider to take you through a recession. Note that I do not deal with psychology and with how to cope with losing money and psychological aspects of recessions and depressions, with emotions and all that. My goal is far more limited and has to do with looking at financial outcomes, financial reasons, financial causes of recessions and what I can do with money, what I can do with other people's money, what I can do while the world is reeling from the 2008 crisis and other questions of this nature. That is the fundamental reason why this article on how to survive a recession basically deals with giving 10 financial instruments/ means and investments for you to make a choice. Where should you put your money? That is the question. In future posts here on this site, the special series will also deal with (theoretically) things you can do to cope and survive a recession if you have been hard hit.

Safest to riskiest investments/ financial devices etc

1. Money
2. Bank deposits
3. Money market funds
4. Bonds
5. Unit trusts
6. Equities/ Shares
7. Complex structured products
8. Futures
9. Forex
10. Hedge funds

(Straits Times, 28th Sep 2008)


Safest to riskiest investments/ financial devices/ holdings

1. Money

This is the most liquid form to hold, and in a recession might be one of the best ideas since stock markets go down in a recession. This form is liquid and can be easily converted from asset to asset, and can tide you over rainy days. However, do bear in mind that money diminshes in value due to inflation and also there is no way that you can make money from money without interest or investment. Thus, money is liquid and useful in a recession but loses its value to inflation and does not earn you a return.

2. Bank deposits

This gives you peace of mind as well as some minute, low interest rate, so bank deposits basically are good for you in a recession. In Singapore as well as in many countries in the world, your bank deposits should be guaranteed, at least up to a certain sum of money. However, if there is a run on the banks in a recession, then you stand to lose your money - or part of your money if the money is not entirely guaranteed. Also, it is possible that inflation may be higher than the little bank deposit interest rate. So while in a recession bank deposits and cash are very safe and very liquid, they also do have their cons, but in a recession you might be safer holding these two very safe forms of money.

3. Money market funds

These rank a bit riskier than money and deposits in a recession, and while these are basically stable and low risk investments, there may be a risk of default when borrowers do not pay back the loans owed and hence the money market funds which lent those borrowers money might lose some money. A money market fund is basically an investment into short term instruments and debt securities, and sometimes government bonds. You can place your money in money market funds for some time and these should be overall quite safe in a recession.

4. Bonds

These are rather safe investments - bonds are basically fixed income instruments where governments and companies raise funds by borrowing money. These are basically debts.

The returns may not keep place with inflation in a recession, and also there is the risk of default, so do stand warned. This is more risky than money market funds which are diversified.

5. Unit trusts

Your investments will be managed by professionals, you can get high returns sometimes, there is diversification; however, in a recession, these are many risks and sometimes you may not get your capital back. Unit trusts (or mutual funds) are only good for new investors or people who have little knowledge of the stock market. In good times, a lot of money can be made, but in a recession lots of money can be lost and your capital and principal may not make it back.

6. Equities/ Shares

If you are Warren Buffett, or for that matter any savvy investor and wise man, this might be a very good option for you, in a recession or not. However, in a recession this may not necessarily be a very good idea unless you have an appetite for risk and you really know what you are doing.

7. Complex structured products

High risk products which give you potentially high returns, but they have complex underlying mechanisms which may not be fully understood by investors - therefore a very risky investment to place a lot of money in a recession.

8. Futures

There are low transaction costs, low outlay with the potential to make a lot of money and become rich, but just as there is potential in making a lot of money, there is a possibility of losing a lot of money as well. Derivatives are usually only for professionals or very savvy and intelligent investors, and even then, in a recession these are very unsafe.

9. Forex

You can generate and make a lot of money in good times and in also still make money in bad times with forex trading and there are many pros and cons discussed here: visit these links here to see what I have written on forex here (a summary page to access links to forex articles here on my finance and investment site).

However there is a need for intensive research, this may be rather dangerous, constant monitoring is needed, and forex is usually only for pros and savvy investors with an appetite for risk.

10. Hedge funds

You can make a lot of money here, but you can also lose a lot of money. You depend on the fund manager here and then again, in a recession this might not be a very good idea. This according to the Singapore news is the worst and most risky investment in a recession, and I must say that I agree. Only investors with a lot of money to risk should do this in a recession, and there must be a ability to wait for the economy to recover. This is the most risky investment when compared to the rest above.

That was a lot of analysis and it deserves a close attention and serious reading. Hope that gave you a better idea of what to expect in terms of investment and money during a recession. More to come on my site on this special series on how to survive a recession!

Thanks for reading, cheers.

Ideas on how to become rich!