How to profit during a recession

Recessions may sound scary, but there are ways to profit if a downturn hits the ASX.

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It is striking how much a recession has been brought up over the course of this year. Brexit, the US–China trade war, yield curve inversions and just the general longevity of the current decade-long bull run have all done their part in stirring up fears through the year.

When (not if) a recession does come, it's very typical to see big, double-digit declines in stock prices across the board.

This is painful for most investors, but there are some ways to profit and make money in a recession-induced ocean of red. Here are two.

Short selling

Short selling involves borrowing shares from other investors, selling them and buying them back at a later date for a lower price and returning them to the lender while pocketing the difference. This is a highly risky strategy and most retail investors won't be able to short individual stocks themselves, but there are ETFs (exchange traded funds) out there that can offer you short exposure.

The BetaShares Australian Equities Strong Bear Hedge Fund (ASX: BBOZ) is one such option. BetaShares states that a "1% fall in the Australian share market on a given day can generally be expected to deliver a 2.0% to 2.75% increase in the value of the Fund (and vice versa)."

Thus, if the ASX enters a bear market, using this fund might help you to bank some profits in such a time. It is still a very risky game to play though, and not one I would personally use.

Holding cash

This is a far more common and (I think) productive way to make returns during a bear market. Cash is the safest investment to hold short-term and thus I always aim to keep a certain portion of my investable capital in cash to take advantage of a recession or bear market.

Of course, your cash won't make you money straight away. But if you keep your eye on some of the best ASX blue-chips during a downturn, chances are you will be able to pick up one or two at bargain basement prices and bank your profits when the bad times end. Just ask anyone who picked up shares of Wesfarmers Ltd (ASX: WES) in 2008 for around $10.

Foolish takeaway

Of these two methods to make money during a recession, I far prefer the second option. Viewing recessions and stock market crashes as opportunities rather than scary wealth destroying events is one of the best ways to ensure long-term wealth generation, in my view. If you're feeling crazy brave, by all means investigate short ETFs further, but I prefer to just hold cash and use it when there's blood in the streets.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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