#InvestInsights: What Should You Invest in During a Recession? An Expert Weighs In.

CompareHero.my Team

CompareHero.my Team

Last updated 09 November, 2021

Are you considering investing when a recession hits during this pandemic, but not sure what to invest in? Here are some tips and advice given by an expert on investment strategies and what you should invest during this period.

Investing during a recession seems scary. The volatility of the market can result in two polarizing scenarios: the rare opportunity to score a huge gain or accumulating an enormous dent on your portfolio (and wallet) due to turbulent market movements.

But investing during a recession is not impossible. Based on findings from our previous article in this #InvestInsights series, we concluded that it may not be a bad idea to start investing during a recession after all, as long as one is aware of their limitations and circumstances.

The rationale behind it is simple - market fluctuations are normal during a recession, and bailing out on the markets will cause more harm than good because it’s always better to hold and regain value than to sell and incur recession-related losses.

But before you can build a profitable portfolio, there are some underlying factors to consider before diving head first.

Factors to consider before investing

First and foremost, as a quick recap from our previous investing article, when it comes to investing, it’s crucial to get the basics right because what you don’t know will cost you.

Secondly, relying on hot tips and hunches, and educational articles (like ours!) is not enough. Investors need to conduct comprehensive due diligence on companies. There’s a lot of publicly available information out there to help you through this process. Suss out the company by reading up their latest news, transactions, financial statements, balance sheet etc. Find out as much as you can about them, especially the basics like market capitalization, revenue and profit trends, competitors, ownership and debt-to-equity ratio.

Related: #InvestInsights: Should You Start Investing During A Recession? An Expert Weighs In

But investing is a two-prong effort - besides understanding the company and what they have to offer, it’s equally important that investors assess their own level of investment capability as well. Figuring out what you’re capable of delivering as an investor, will ultimately help you decide the crucial factors to consider before investing.

To help us identify what types of investments to consider during a recession, CompareHero.my spoke to a certified financial planner and personal finance blogger to help us get two different perspectives. But before we get there, you need to first ask yourself six very important questions.

6 questions you need to ask yourself before you start investing

Mull over these six questions to help assess whether you are ready to make an investment:

1. Are you capable of investing right now?

Investing for a house? Or maybe a new car? Narrow down your goals before you begin investing. 

With COVID-19 still rampant across the globe and the economy still in shambles due to the Movement Control Order (MCO), investors need to be frank about their own capability of investing.

For most people, having a secure income or building an emergency fund are their current top priorities. Investors must figure out if they are fit to invest before even beginning to invest.

“From my perspective, survival is the absolute priority right now. Let's say you are in an industry where you feel the job isn’t very secure and you have loans to pay - I think someone in this instance shouldn't just be thinking about survival but potential loss of income,” said Aaron Tang of Mr Stingy, a popular personal finance blog that covers a variety of topics, including money, time, career and relationships.

Though Tang isn’t a certified financial planner and doesn’t have formal financial advisory credentials, he’s gained an extensive following online from writing about personal finance on his blog, Mr. Stingy, in his spare time. (Image source: Mr. Stingy)

“What happens if a person’s company goes down and they’ve lost their income? I think someone in that situation is thinking about income replacement before investing, especially in today’s bad economy where people are getting laid off and shops are closing etc.,” he added.

To help cushion any unwanted circumstances during a recession, Tang said it’s crucial for everyone to prioritize building their emergency savings first, which is typically 6 to 12 months of a person’s income. “From how I see it, you need to build a very secure base first, and that comes from having a stable income. This is particularly true when investing in high risk investments,” he said.

2. What are you investing for?

Your risk appetite and duration of investment, a.k.a your time horizon, depends on which stage of life you’re in. (Image source: Harveston Financial Group) 

Everything that we do or pursue in life usually begins with a clear objective in mind. Why do we go to school? To gain knowledge which would later help us find a job or career that aligns with our interest. Why do we find a spouse? So we can have a partner in life who we get to spend time with and build a family together. The principle applies to investing too.

Before investing, take a step back and remind yourself of the objective of your investment. Are you just eager to beat the market and make a quick buck by maximizing returns in the short term? Or is it for more personal gains like retiring, having enough to travel, buying a house or sending your kids to college?

Find out your real goal and stick to it. If it is having a certain amount of money by a certain date, then commit to that. Any decision you make while investing should be to serve that goal and nothing else.

3. What stage of life are you in?

People in different stages of life will have different needs and resources, and figuring out which life cycle you belong to will help you understand what types of investments suits you best. (Image source: Harveston Financial Group)  

A 25-year-old fresh-out-of-college will have different financial goals and needs compared to a mid-age 35-year-old, or a retiree.

Similarly, a fresh graduate wouldn’t be able to take up the same amount of investment risk compared to an established manager who might be earning a six figure salary. Therefore it is crucial to figure out which stage of life you’re in before committing to a certain investment risk.

A certified financial planner, Phang is also licensed by the Securities Commission Malaysia as a Capital Markets Services Representative and by Bank Negara Malaysia as a Financial Adviser’s Representative. (Image source: Phang Kar Yew)

A person’s life stage determines their risk appetite, Phang Kar Yew, Executive Director and Co-Founder of Harveston Financial Group said, these two factors must go hand in hand in order for a person to pin down the most suitable type of investment for them.

“When you’re younger, you may afford to take the ‘fast and furious’ approach, which is to be more aggressive in the market. But I still believe that at that stage, the priority should be about wealth protection. You have to protect yourself in the event anything unfortunate happens,” Phang told CompareHero.my. “This is called investing according to the stages and lifestyle requirements.”

4. Do you understand your needs and resources?

Do you have enough to invest? Begin your journey with this crucial question first.

Take some time to figure out if you actually have enough resources to invest. Purchasing a stock may not be too complicated or time consuming, but the act of planning and figuring out what and how much resources is available at your disposal is what needs more of your attention.

  • How much do you currently have in savings? 
  • How much do you need to invest? 
  • How will this investment add into your overall portfolio? 
  • Do you have an exit strategy if things don’t work out?
  • Would you need to adjust your current investments plans? 

Understanding your own capacity to invest helps you go into it prepared, knowing that you are aware of your resources and limitations. You should never commit to what you’re not willing to lose.

“Maybe you did some small investments previously but didn’t have a cohesive plan to go with it, and now you want to make another big investment - that needs to be reviewed,” Phang said.

5. What is your risk appetite?

An investor’s risk appetite is sometimes a reflection of who they are and their personality - it says a lot about them as a person and what they value.

If you’re more adventurous, are aggressive and have the means, you could be more of a risk taker in the market. A conservative investor would be more risk averse, avoiding volatility and emerging industries due to their inability to estimate the returns. And risk moderates are people who sit on the fence, they observe the market and take small steps on both ends.

An investor’s risk appetite depends on where they are in their stage of life and what goal they hope to achieve from their investment (point 3).

Those eager to make a quick buck, may not want to invest in volatile markets because they could end up losing fast, too. Those in it for the long-term may consider taking up higher risk investments because it gives you a longer duration to make up for any potential loss.

“You need to first understand the amount of risk you are willing to take because there’s a lot of different types of investments. Doing this requires you to understand what type of person you are,” Tang said.

“Are you very risk averse? This means you like really safe investments that will give you slightly less percentage returns. Or are you a person who is willing to take more risks, willing to bear more ups and downs in the market. There's no right or wrong answer as different people will be able to take up different risks,” he added.

6. Is now the right time to invest and how long will you need to invest?

There are a few time-related questions that you have to answer before starting an investment.

First, you need to figure out your duration of investment or time horizon: short-term or the long-term. The fact is not everyone invests to retire - some just want to invest for quick returns in the short-term.

Investors who are waiting out on the long-term can take up more risk because they have a longer time to recover from any potential loss. Those who do not have the same luxury of time might want to stick to less risky investments like bonds to avoid losses as it will affect your plan.

Figuring out your time horizon is also important because you need to know if you could do without the money invested. Some investments like fixed deposits won’t allow you to withdraw your money until your agreed-upon tenure has ended. This is mainly because fixed deposits offer a much higher interest rate than your average savings account, so make sure that you do not need the money before investing. Essentially, don’t put all your eggs or money into one basket or in this case, investments.

Lastly, figure out if you’re ready to invest. You might not actually be at the right stage to invest because of other commitments or the lack of time to dedicate yourself to investing.

“The responsible way to invest is to take some time to do research and understand the different products. The brutal truth is most of us may not have that level of time to go read and study so many books or articles because we are caught up with our responsibilities like taking care of our children and family etc.,” Tang said.

Find an investment platform that makes sense for your lifestyle. For example, though I like reading about money, I don't necessarily have time to research individual stocks, so what I do is depend on a robo advisor - there are a couple in the Malaysian market right now because it's a very simple and convenient way to invest. That kind of product really fits in with my lifestyle,” he added. There are currently three robo advisors in Malaysia: MYTHEO, StashAway and Wahed Invest.

After you have sorted out these important questions, then you’re somewhat ready to plunge into the actual investing.

What to invest in during a recession?

At the end of March 2020, investors’ asset preferences skewed between cash, bond, property and equity according to findings from Harveston Financial Group. (Image source: Harveston Financial Group) 

Generally, when looking for stocks, investors should put their money into high-quality companies that demonstrate strong balance sheets, low debt, good cash flow and are in industries that historically have proven to do well during tough times.

At the same time, avoid highly leveraged, cyclical, speculative companies because they pose the biggest risk for performing poorly or going bankrupt.

“During a crisis, a majority of people tend to focus on gold and U.S. dollars, even if the latter is seeing negative yield and zero interest rates,” Phang said. “People still (favour) U.S. dollars because of its popularity, it's on good terms and widely used as a trade medium. People invest in gold because they feel panicked.”

But under normal circumstances, Phang said, U.S. dollars and gold may not give the highest return or value. Instead, it would be more favourable to go into bonds, property, equity and commodity.

Phang wanted to emphasize that when it comes to choosing assets to invest in, there are no set preferences. Instead, a better investment approach, he believes, is to create a portfolio based on a mix of asset classes.

Based on historical figures and asset performances, Phang said, the S&P 500 index, U.S. Treasury securities, REITS, cash, gold, the Global High Yield Bond Fund, the Global Investment Grade, the MSCI EM index, commodities and the MSCI EAFE Index have all generally performed more consistently than other class assets. (Image source: Harveston Financial Group) 

Asset classes are a group of financial instruments that have similar financial characteristics and behave similarly in the marketplace. However, different asset classes are expected to exhibit different risk and return investment characteristics, and to perform differently in certain market environments. This rationale is why diversification may be the safest strategy to take when investing.

Not happy with a certain asset class? Well, an investor’s portfolio, Phang said, is also likely to change according to the market conditions, which is largely influenced by market fundamentals, sentiment, and valuation.

  Immediate needs 
less than 3 months
Short term 
3 to 6 months
Mid term 
6 months to 3 years
Mid to long term 
3 to 5 years
Risk tolerances Preservation for liquidity Conservative for capital preservation Conservative for income preservation  Moderate   Aggressive
Type of investment • Current account
• Savings account
• Money market
• Money Market
• Fixed Deposit
• Fixed Income
• Local Bond Fund
• Direct Bonds
• Asian Bond & Structured fix
• Income Funds
• Balanced Fund
• Dividend Fund
• REITS Fund, Equity
• Asia Pac & China Focus Equity Fund

An example of a crisis management portfolio (Source: Harveston Financial Group)

Diversifying one’s portfolio based on asset allocation, Phang said, is important because no single class of assets would remain high performing in the long-term. “If you just choose one (asset) over the other, over time, you might end up losing more than earning,” Phang said.

“For a balanced approach, you should understand your own asset allocation,” he said. And though there’s no winner-takes-it-all type of approach, Phang said, there are common portfolio profiles used by investors that have produced consistently high returns.

The key? To diversify based on asset allocation.

There’s concrete evidence showing that asset allocation is the most important factor that affects a portfolio’s performance. (Image source: Harveston Financial Group)

Asset allocation is essentially an investment strategy that aims to balance risk and reward by distributing a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon, according to Investopedia.

This factor, Phang said, is where one must define their goals and time horizon, assess their risk tolerance, identify a mix of asset portfolios and create a target portfolio. Then finally select specific investments for the portfolio, before finally reviewing and rebalancing the portfolio.

There are four types of strategies for investors to take in order to build a stronger portfolio during difficult times. (Image source: Harveston Financial Group)

So with all the technical information overload, you may be wondering, which investment would be the most suitable for you?

Well, for a more relatable perspective, we asked Tang to share what he believes are the three best types of investment during a recession. He had previously shared his own portfolio in his recent blog post.

Go for more conservative assets

Unit trusts under Amanah Saham Nasional Berhad (ASNB), Tang said, is a good conservative option as it has historically demonstrated good returns. Last year Amanah Saham Bumiputera (ASB), one of the unit trusts under ASNB, generated an income distribution of five sen a unit and a bonus of 0.5 sen amid a challenging market environment. “I think people should put the majority of their assets into safe assets like this because even in the worse scenario, you are not gonna lose money,” Tang said.

The other good option, Tang suggested, is the Malaysian Employee Provident Fund (EPF) because it has produced consistent returns (4.5-6.9%) over the past 13 years. EPF is also required by Malaysian law to pay yearly dividends of at least 2.5%.

Another relatively good investment to consider during a recession are Exchange Traded Funds, Tang said. Just like a stock, it is traded on stock exchanges as well, but what makes an ETF different is that they track an index, a commodity, bonds, or a basket of securities.

“ETFs are not a sure guarantee because they can still go up and down,” Tang said. “An easy way to manage it is via a robo advisor (like Stashaway). For this kind of investment, you’re investing in a broad stock index, and if you look at the U.S. stock index, historically, it has gone up over time. Though it may go down because of the recession, over time it will be okay.”

In terms of what types of investment to avoid during a recession, Tang said, the general rule of thumb is to avoid any investment that you don’t have a fundamental understanding about.

“I’m not going to pick a specific investment because, if you take forex, for example, from my understanding, most people who invest in forex probably won’t make money but there is a small percentage of people who do understand and presumably have been able to make money. So it kind of depends on whether the person has sufficiently learned enough or gained enough knowledge about it,” he said.

Tang also dabbles in cryptocurrency investment, which many would consider a high-risk investment. “I am very interested in the technology and the asset itself. For me, it’s a very manageable risk and I am willing to put some of my investment in crypto because I feel comfortable with it,” he said. “That’s an example of a situation where maybe it’s not for everyone, but if you have put in the time to learn an experiment with it and you limit your risk, then it’s an appropriate decision.”

But both Phang and Tang emphasized that it's always better to lean towards the more conservative assets, especially if one is not yet well-versed in investing and is still learning.

Final thoughts - play the long game

During this tumultuous and difficult period, it may be scary and counterintuitive to continue to channel your hard-earned money into the marketplace, but it will rebound over time. And taking it out might be premature if you’re playing the long game.

The best course of action, as investors, is to be prepared, remain vigilant, and hold out for the long game because it will pay well on the long-term. Being prepared also means, as an investor, you get to avoid joining the crowd of investors who sell or buy in panic.

Wherever you are in your investing journey, we wish you all the best and remember that investing is like riding a bicycle - to keep the balance, you must move forward. We hope you find this piece informative and helpful!

Also read: #InvestInsights: Islamic Financial Planning – Socially Responsible Investing, Green Sukuk And Sukuk Prihatin: Here’s What You Need To Know

Disclaimer: Neither CompareHero.my nor the content on it is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. The content on CompareHero.my is for general information purposes only and is not intended to be personalised investment advice or a solicitation for the purchase or sale of securities.

Compargo Malaysia Sdn. Bhd. and/or its affiliates cannot and do not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. CompareHero.my may receive compensation from the brands or services mentioned on this website.

The CompareHero.my team is comprised of many talented individuals, sharing their knowledge, experiences and research to help others make better financial decisions.


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