How to Build Wealth in a Depressed Economy

By Mark on 28 October 2010 (Updated 20 October 2011) 3 comments
Photo: Minsay Mohan

The current economic environment has led many investors to become pessimistic about the United States' economy. Consumer confidence is low and unemployment is running high. But as Warren Buffett has often noted, economic recessions are when investors can find some of the absolute best opportunities.

Let’s take a look at a few ways to build wealth during the current downturn. (See also: 5 Money Lessons From Millionaires)

Invest in areas where no one else is 

One of the easiest ways to lose your hard-earned dollars is by following the crowd. Fear is causing many investors to rush to the safety of Treasury bonds and gold. These assets do have some value, but they are not the best opportunities right now. The time to rush into gold was when no one was buying it at $300 or $400 per ounce. Gold now trades at nearly $1,400 an ounce. You never want to chase an investment when it is trading close to its all-time high valuation.

Investors looking for a nice return should turn their attention to the assets that investors are avoiding. Stocks and exchange-traded funds (ETFs) in the financial sector have been underwater for years now. Many technology stocks are still trading at prices below their true value. The steel and industrial production sector contains some great values as well. These investments are long-term holds that could reap serious rewards for risk-taking investors.

Build another income stream

Unemployment may be running high, but that shouldn’t deter you from starting your own company. A bad economy is the perfect impetus for starting an online business. There are needs for temporary agencies, consultants, and webpreneurs. All of these businesses require very little overhead and can be started from the comfort of your own home. Most just require paying a few bucks for a domain name to get started.

A part-time job can also add a little income. You can do freelance writing or design work for other companies and bring in an extra couple hundred dollars a month. You can start you own catering business or run errands for people in your neighborhood. If you love pets, then start a pet-sitting business. Your entrepreneurial venture could end up turning into a full-time job.

Buy residential real estate

The real estate market looks like an absolute mess right now. Foreclosures are peaking and home prices continue to be depressed. Every market pundit is predicting more pain for the real estate sector. But while the market may be tough now, but there are signs that the sector may finally be reaching bottom.

Mortgage rates are the lowest that they have been in decades. This could help entice some homebuyers and real estate investors back into the market. Remember back in 2009 when everyone was so pessimistic about the stock market? The market reached its low early in 2009 and has bounced back nicely. Many investors missed the rebound waiting for another market drop.

The same thing could be setting up right now in the real estate market. Everyone is waiting for commercial and residential real estate to hit bottom. The truth is that no one can tell when a market is at its lowest point. Investors with the capital should consider getting in these markets now, as they are much cheaper than they were just a few years ago.

Remember that during a bad economy can be the best time to implement your wealth-building strategy. Just because the economy is in a downswing doesn’t mean that you cannot emerge from these difficult times in better financial shape than you entered them.

This is a guest post by Mark. Mark publishes his own financial blog at Buy Like Buffett. He is a registered investment advisor and has written financial columns for Baltimore and Washington D.C. area newspapers. Read more by Mark:

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Guest

Real estate has only gone back to 2005 price level so far, that's not enough. Even if the housing market indeed stops dropping, it can still remain flat for the next few years.

Guest's picture
Deb

I couldn't agree more about real estate. Now is a good time to be stuffing cash into savings for a good RE purchase.

We simply moved from our old home to another (great price and extra large acreage for subdiving in 20 years). We rented out our old home. Positive cash flow of $100 a month to start which will grow through the years.

People went nuts in the over exhuberant real estate bubble and purchased on speculation, or purchased homes worth 4-5 times their annual pay.

Successful RE investment means doing your homework. Look for a good bargain in the best location you can afford, and do the math so that you will have at least a break even situation that will soon lead to positive cash flow. Learn to do mainenance and upkeep yourself, or have a very good handyman. Don't skip background/edit checks.

RE is wonderful in that you are using other people's money to build your equity - to me that's virtually the same as a 401(k) match, just a different investment. My husband and I plan to buy a duplex RE within 18 months, and we're very excited about it.

Guest's picture

Great advice Mark. I think real estate is the way to go as well. Rent will only go up and now is a great time to pick up some rental property if you have the capital.