Recessions are typically followed by a recovery. This recovery includes a strong rebound in the stock market. As Kavan Choksi Hong Kong points out, as the market begins to plunge, it would be a good time to take advantage by increasing contributions to or starting dollar-cost averaging in a non-qualified investment account. Mutual funds or exchange-traded funds (ETFs) that invest solely in dividend-paying companies would be among the best ways to own dividend stocks.
Kavan Choksi Hong Kong marks the key ways to take advantage of a recession
Much like most of the previous recessions, there is a good chance that people shall probably will not see the next one coming. However, there is a good chance that they will observe a sell-off in the stock market well in advance of a recession. However, when this happens, it is important to keep in mind that the stock market will ideally start to bottom well before the end of the recession. This knowledge can help investors can take advantage of a declining market by making use of the dollar-cost averaging method of investing. Any person making monthly contributions to a qualified retirement plan, would essentially be already using this technique. However, as the market begins to plunge, it would be the perfect time to take advantage by increasing the contributions to or starting dollar-cost averaging in a non-qualified investment account.
As investor chooses to dollar-cost average their investing, they would basically be reducing their overall cost basis gradually in the share price. As the price rebounds over time, the cost basis will often be lower than the price. For instance, an investor chooses to invest $500 a month in a mutual fund selling for $25, and their contribution buys 20 shares. In case the share price drops to $20, their contribution would buy 25 shares. The account will ultimately have 45 shares with an average cost basis of $22. When the share price drops, the $500 contribution buys an increasing number of shares, while the cost basis continues to drop. As share prices rebound, the contribution tends to buy fewer shares each month, however, the current share price is always higher than the cost basis. Dollar-cost averaging method of investing works best over the long term for investors who do not want to worry about the performance of the investments.
In case an investor holds stocks during a recessionary period, they should try their best to own the ones from established, large-cap companies with robust cash flows and balance sheets. These companies are better-suited for weathering economic downturns in comparison to smaller companies that have poor cash flows. Moreover, they are also more likely to pay dividends. As Kavan Choksi Hong Kong mentions, dividends can serve multiple purposes for investors. In case a company has a long history of paying and increasing dividends, investors can have the peace of mind that they would not be too much affected even in harsh economic environments. Dividends also provide a return cushion. Even as share prices decline, investors would still receive a return on their investment. As a result, dividend stocks commonly outperform non-dividend stocks during market downturns.
