Recession Proof Stocks - How to invest in a bad economy, Part 1

When the economy takes a down turn, many investors reach for the antacids. The slightest hint of a recession often fuels widespread panic among investors, and a frenzied sell off in the stock market. While the average investor is scurrying to get their sell orders entered, the smart investor is picking up great stocks at a deep discount.

In this series of articles, I'm going to speak to the topic of recession proof stocks from two angles:

This approach focuses on gaining profits... an offensive approach. It is for those investors who can tolerate a higher risk, in hopes of receiving a much higher reward. This method isn't for the faint of heart. If you are an investor who cannot afford to lose money without it affecting your lifestyle; Or if the thought of seeing red numbers on your trading screen keeps you awake at night, then this method is not for you. The game plan for the capitol accumulation approach, is to buy the stocks that everyone else is frantically selling (but only the good ones, which I'll talk about later), picking them up at rock bottom prices. The idea behind this strategy is, the economy won't be in decline forever, and these stocks will rocket back up once the economy swings to the up side.

This approach focuses on not losing money... a defensive approach. It is for those investors who find more comfort in slow or no growth stocks, than with the possibility of losing a chunk of their account balance. This is the safest bet in a declining market. It probably won't make you double-digit returns, but it will keep you from a consistently declining brokerage account.

Lets begin with a couple of definitions. What is a recession?
Technically, a recession is two full quarters (six months) of negative GDP growth. GDP, or gross domestic product, is the total market growth of all goods and services produced during a specific time frame. In simple terms, a recession is the result of a shrinking economy.

When you are an investor in a shrinking economy, there are a few things that you have to understand... or you could lose a lot of money.

1. Just like in a booming bull market, where there is always that inevitable top, there is also always a bottom in a bear market. The most important thing to do is to not panic. The professional fund managers have been through this before and they aren't panicking... neither should you. The economy will bounce back.

2. Whether you take the aggressive or the conservative angle, it is vitally important that you really understand the fundamentals of the companies you are investing in. During a bad economy, your portfolio should only consist of companies that have very strong fundamentals. Stay away from anything cutting-edge that doesn't already have a proven financial track record. You want companies with low debt, a history of steady growth, a history of strong earnings, and a low P/E ratio.

3. Don't get trigger-happy on clicking the "sell" button. Just because a stock is returning negative numbers today, doesn't mean it won't be in the green in the near future. If a company truly has strong fundamentals, give it time, it will come back up. The last thing you want to do is sell at a loss, unless you absolutely have to. Now on the flip side of that, if the company doesn't have good fundamentals, it probably won't climb back up when the economy strengthens. In the case of bad fundamentals, it's better to cut your losses and put your money into a better stock.

In part 2, I'll delve into the details of the capitol accumulation method of investing during a recession.

Click here to sign up with Xomba and start getting paid to write!

Florida DWI Lawyer