What Makes an Investment Recession Proof?
Definition of an investment:
Britannica defines an investment as the process of exchanging income during one period of time for an asset that is expected to produce earnings in future periods. Wikipedia defines an investment as a commitment of resources to achieve later benefits”. If an investment involves money, then it can be defined as a “commitment of money to receive more money later”.
Definition of a recession:
Investopedia defines a recession as a significant, widespread, and prolonged downturn in economic activity. A common rule of thumb is that there are two consecutive quarters of negative gross domestic product (GDP) growth.
Recession proof investments:
An investment that is recession-proof is one that can withstand economic downturns and continue to perform well. This is a checklist of what makes an investment recession proof:
- Is it well diversified? A recession-proof investment portfolio should be diversified across various asset classes, such as stocks, bonds, real estate, and commodities. This helps to reduce the overall risk of the portfolio and ensure that there are opportunities for growth even during tough economic times.
- Are the dividends from this investment stable? Companies that pay stable dividends are often considered more recession-proof because they provide a consistent stream of income to investors, regardless of market conditions. These companies are typically more established and have a strong financial foundation.
- Does the company have solid balance sheets? Companies with strong balance sheets are better equipped to weather economic downturns because they have the financial resources to continue operating even if revenues decline. Look for companies with low debt levels and ample cash reserves.
- Are they in defensive industries? Some industries are more recession-proof than others. For example, consumer staples (like food, household items, and pharmaceuticals) tend to be less affected by economic cycles because people still need to buy these items even during tough times.
- Does the investment strategy have a long-term perspective? A recession-proof investment strategy should be focused on the long-term. This means avoiding short-term thinking and making investment decisions based on a company’s long-term prospects rather than short-term market trends.
It’s important to note that no investment is completely recession-proof, as all investments carry some degree of risk. It is crucial for the investor to carefully select investments that meet the criteria mentioned above, in order to generate cashflow and build wealth.
There are some investments in Africa that can withstand a recession. An investor looking for African investments should consider the following:
- Agriculture: Agriculture is a key sector in many African countries and can be less affected by economic downturns because people still need to eat even during tough times. Investing in farmland or agribusinesses can provide steady returns over the long term.
- Infrastructure: Infrastructure projects such as roads, bridges, and power plants can provide stable returns because they are often backed by government guarantees or long-term contracts. Private equity funds that invest in infrastructure projects can be a good way to gain exposure to this sector.
- Consumer goods: Companies that sell consumer goods such as food, beverages, and household products may be less affected by recessions because people still need to buy these items even when times are tough. The investor should look for companies with a strong brand presence and established distribution networks.
- Healthcare: Healthcare is another sector that can be less affected by economic cycles because people still need medical care regardless of their financial situation. Investing in hospitals, clinics, or pharmaceutical companies can provide steady returns over the long term.
- Financial services: While financial services can be hit hard during recessions, some companies may be better positioned to weather the storm than others. Look for banks or insurance companies with a strong capital base and diversified revenue streams.
It is imperative that you do your due diligence and work with an experienced financial advisor before making any investment decisions.
