Investing In A Down Market

TruePoint Capital

Wells Fargo CEO Charlie Scharf is not the first high-profile figure in the financial world to sound the alarms on an impending recession, and he won’t be the last.

Wells Fargo CEO warns the U.S. ‘it’s going to be hard to avoid some kind of recession’ –Fortune.com.

In the face of inflation, high fuel costs, rising interest rates, and now recession fears, the common and natural reaction of the average investor is to run for the exits as the stock and crypto markets are bearing out. The Dow is down over 15%, and Bitcoin has shed nearly 30% of its value.

Should you retreat in a down market?

If not, how should you invest in a down market?

You should never retreat in a down market because you’ll be playing the timing game you can’t win. The problem with sidelining cash is investors usually wait too late to get back in the game.

​​Always remember to:  Zig, when everyone else zags.

A contrarian investor is an investor that does something different than what the mainstream investors are doing. While everyone else was going crazy for stocks and crypto over the past two years, the contrarians were allocating to cash flowing tangible assets that offered income, growth, and tax benefits.

​​Now, as the mainstream investors sideline cash, the contrarian investors are stockpiling cash for one reason: to go bargain hunting when a recession hits. While the rest of the investing public plans to sit on the sidelines during the next recession, the contrarians are looking to dive in headfirst.

What kind of assets will contrarians be snapping up?

The same kind of assets they’ve always been drawn to – cash-flowing tangible assets with tax benefits uncorrelated to the broader markets and insulated from inflation. This time, they’re just anticipating entering at lower price points due to a downturn.

Take a clue from smart contrarian investors for how to invest in a down market. Why are they drawn to inflation-insulated cash-flowing alternative assets?

Income Protection.

In a downturn, cash-flowing assets such as real estate and equity investments in productive private businesses (private equity) offer income protection. Passive income from these assets can offset any lost income from job eliminations or reductions.

Inflation Buffer.

Essential assets and services that don’t lose demand or even thrive in an inflationary environment are ideal for protecting buying power. So, even as the average consumer suffers a severe reduction in buying power, those with passive income in assets that keep pace or even outpace rising prices are best positioned to ride out an inflation crisis. Affordable housing is one recent example of an asset that thrived in a downturn post-2008 Financial Crisis. In the most recent example, networking software, online shopping and entertainment, and industrial real estate thrived during the COVID pandemic.

Shield From Volatility.

Private assets are shielded from broader market volatility. The illiquidity of the private markets buffers assets from stock market volatility driven by herd behavior enabled by instant liquidity. Assets shielded from volatility give their investors peace of mind and the assurance of constant and reliable income and growth.

Tax Benefits.

Private investments structured as partnerships offer significant tax benefits, including long-term capital gains treatment, passthrough deductions, avoidance of self-employment taxes, etc. In an inflationary environment and during a recession, keeping more of what you make becomes a valuable arrow to have in your quiver.

In a down market, be a contrarian. Stay in the game but invest in the right assets that will help you weather the oncoming storm or any storm.

​​Seek cash-flowing private alternative assets buffered from volatility and inflation for income protection during a downturn.