After a 2.5% drop in GDP in Q1 this year, the UK registered another 19.8% fall in Q2. Technically, this means the UK is in a recession, with two consecutive quarters of negative growth. This fall can be put down to the impact of the pandemic, but it shouldn’t put off investors from trying to make profits. When trying to make a million from investing, the state of the economy is important but not critical. This is because some stocks and other assets have a negative correlation to the state of the economy. In simple terms, some stocks actually outperform when the economy underperforms.
Seek negative correlations and income The first way to make a million from investing at the moment is to target stocks or other assets that actually perform better during this stage of the economic cycle. For example, take defensive stocks such as supermarkets. The likes of J Sainsbury (OTC:JSAIY) and Tesco (LON:TSCO) offer products that are in demand at any stage of the cycle. During a downturn, demand will remain steady but could also increase with a negative correlation. This ties in to economic theory, that states that as income falls, consumers buy more goods deemed as necessities and cut back on subjective luxury items.
Investors can also look to profit from buying gold. This could be via a gold ETF or from a mining stock, such as Polymetal International. Gold traditionally has a strong negative correlation to global uncertainty. The price typically rises during bad times, which would explain why it’s up 27% over the past year. Given this performance over a relatively short period, it’s easy to see how making a million is possible should this performance be replicated again in 2021.
Secondly, focusing on income during a recession is another way to aim to make a million. Even if stock prices are falling, you can still generate real money via dividend payments. Some of The Motley Fool team’s top income stocks for October can be read about here. For example, Vodafone (LON:VOD) is currently offering a dividend yield of over 7%. Assuming you invested £500 a week with dividends reinvested at the same yield, you’d get to the million mark in just over two decades. It’s unlikely you’ll just target income, but it shows that you can make sizeable returns from just dividends.
Investing for the long term The final way to make a million from investing right now is simply to buy stocks at ‘cheap’ valuations. The recession will pull some share prices down to a level that makes them fundamentally cheap. Through buying the stocks during the recession, you can increase the chances of making outsized returns in the long term. This can add extra percentages per year to your average return. For example, investing a lump sum £1,000 a month at 10% annual return will take you around 26 years to get to the million. Adding an extra 2% reduces that by almost three years!
A recession is never pleasant to live through. Yet for long-term thinkers, it doesn’t mean you should stop investing.
The post 3 ways I could make a million from investing despite the UK being in a recession appeared first on The Motley Fool UK.
jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020