Buying a business in recession - PART 4, What Not to Buy in a Recession?

During a recession, some assets tend to underperform due to decreased demand and increased uncertainty. Here are some assets that investors may want to avoid during a recession:

Luxury goods: Luxury goods, such as designer clothing, expensive jewelry, and high-end cars, tend to underperform during a recession. During tough economic times, consumers tend to cut back on discretionary spending and focus on essential goods and services. This can lead to decreased demand for luxury goods, which can in turn lead to decreased sales and lower stock prices for luxury brands. For example, during the 2008 recession, sales of luxury goods declined by 8%, according to a report by Bain & Company.

Highly leveraged stocks: Highly leveraged stocks, or those with a high level of debt relative to their equity, tend to be riskier during a recession. When economic conditions worsen, highly leveraged companies may struggle to meet their debt obligations, which can lead to default and bankruptcy. This can lead to a sharp decline in stock prices or even total loss of investment. For example, during the 2008 recession, highly leveraged financial companies, such as Lehman Brothers and Bear Stearns, suffered significant losses and ultimately went bankrupt.

Travel and hospitality-related stocks: During a recession, consumers tend to cut back on travel and entertainment spending, which can lead to decreased demand for travel and hospitality-related stocks. This can include airlines, hotels, and restaurants. For example, during the COVID-19 pandemic, travel-related stocks suffered significant losses as travel restrictions and decreased demand caused revenues to plummet.

It's important to note that while these assets tend to underperform during a recession, they can still have a place in a well-diversified portfolio. Additionally, it's important for investors to focus on their long-term investment goals and risk tolerance when making investment decisions. By having a diversified portfolio that includes a mix of defensive and growth-oriented assets, investors can potentially navigate a recession with confidence.

In conclusion, investors may want to avoid luxury goods, highly leveraged stocks, and travel and hospitality-related stocks during a recession. These assets tend to underperform due to decreased demand and increased uncertainty. However, it's important to remember that these assets can still have a place in a well-diversified portfolio and that investors should focus on their long-term investment goals and risk tolerance when making investment decisions.