Aug 19, 2022
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Certain politicians have dismissed the idea that the U.S. is currently in a recession. But if you look up the textbook definition, it seems like we can’t avoid using the “R” word anymore.
A recession is defined as two consecutive quarters of real GDP contraction. And real GDP in the U.S. decreased at an annual rate of 1.6% in Q1, followed by 0.9% decline in Q2.
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Recessions are prolonged downturns in economic activity, usually associated with falling retail sales, lower industrial production, declining wages, and higher unemployment.
The good news? Downturns also provide plenty of opportunities for regular people to build wealth.
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Stocks
Every investor wants to buy low and sell high. A stock market downturn during a recession might be an opportune time for bargain hunters.
While the GDP contraction in Q1 and Q2 wasn’t too severe, stocks have already fallen — by a lot.
The S&P 500 is down about 20% in the first six months of 2022, marking its worst first-half performance since 1970.
Investors who want to scoop up shares on the cheap might want to be cautious and focus on companies that can thrive during a recession.
Warren Buffett, for instance, loaded up on shares of food giant Kraft Foods (which later merged with Heinz to create Kraft Heinz) and electric utility NRG Energy (NRG) during the Great Recession of 2008.
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According to Hartford Funds, the S&P 500 actually gained 3.7% on average during the 13 recessions since 1945.
You don’t need a lot of cash to start investing. Some investing apps even allow you to buy fractions of shares with as much money as you are willing to spend.
Real estate
Real estate offers another potentially lucrative opportunity during a recession.
A recession doesn’t necessarily mean we are going to see a drop in property prices. But one specific factor could deter the upward momentum in the real estate market: interest rates.
Right now, the Fed is raising its benchmark interest rates aggressively to tame spiking inflation. Higher interest rates are bad news for real estate.
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When the cost of borrowing is high, it makes people think twice about getting a loan to purchase a home or investment property.
Real estate mogul Sam Zell — also known as the “Grave Dancer” — made a fortune from buying properties when no one else wanted to.
In 1973, when the economy fell into a recession, the real estate market tumbled as many loans went into default. In that environment, Zell was able to acquire a portfolio of high-quality properties at a significant discount.
If you’ve been eyeing investment properties in recent years, a recession-driven pullback in prices might provide a good entry point.
These days, new services make it easy for you to get into the real estate game, no matter how big (or small) your budget is.
Read More: Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
Starting your own business
Not everyone wants to start their own business. But according to The Economist, 47% of millionaires are business owners.
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Being an entrepreneur is not easy, and the idea of building a business in a recession — when other businesses might be shutting down — can seem daunting. But going against the herd has its advantages.
“Right now is the time to take advantage of an open field. Your competitors are pulling back — spending less money on marketing and advertising,” says Charles Gaudet, CEO of business consultant and coaching agency Predictable Profits. “Some started laying off employees. Others are content to sit tight and hope for the best.”
When there’s less competition, you have a better chance of establishing a position in the market.
Of course, if you’re not ready to quit your job and go all-in on a business idea just yet, think about starting a “side hustle” first.
There’s no magic formula to getting rich quickly. Whether it’s investing in stocks, real estate, or starting your own business, it’s important to do your own research and evaluate your financial situation first.
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Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
