Don't Get Caught in a Crowded Trade During a Recession

A recession is a very tough time to be investing your money. The plain simple fact is that most assets that carry any kind of risk at all are thrown out during a recessionary period like we are currently in. The only things that are consistently working are treasury bonds, money market savings accounts and certficates of deposits.

While it may be difficult to understand at first, I am here to provide a contrarian investing tidbit. At this point in the cycle things such as treasury bonds have been bought up so strongly that they are yielding virtually nothing at all. In fact, in a couple of instances treasuries were actually yielding zero or below in recent weeks. It is quite astounding to think that this could be happening, but it is simply because people are afraid to put their money anywhere else. Certificates of deposits and money market accounts are safe and yield something, but very little in this economy. Still, between treasuries and certificates of deposits I believe that cd's are the clear winner right now.

What exactly is a crowded trade? A crowded trade is a trade that seemingly everyone on Wall Street and even Main Street thinks is the best way to make money right now. What is the problem with this? The problem here is that once everyone believes this is the way to make money you are too late to the party and you can be hurt quite badly. There have been many circumstances down through the years where everyone thought it was wise to buy something like gold, oil, or other commodities, but hindsight proved that it was actually a very poor investment at the time.

Investing in the stock market or other asset types is not an easy game and there are no free lunches. Crowded trades that end up hurting people occur because too many people think they are getting into the next "sure thing." For example, before the Internet bubble burst many people thought that as each Internet initial public offering came along, they couldn't possibly lose money on them since they were being bid up so quickly. Eventually this all came to a screeching halt and millions of Americans were hurt very badly by being so heavily invested in technology stocks in the early 2000's.

The bottom line is that about the time you hear everyone agreeing that a certain stock or certain asset type is the perfect investment in a particular, it is probably time to start getting worried about that asset or stock. Money doesn't come that easily, so don't let yourself think that it does!