When the market is soaring, it’s easy to forget that what goes up can also come down.But economic slowdowns tend to be cyclical, which means that another recessionis in the future. Whether it’s fast-approaching or still a ways off, it’s wise to prepare for its eventuality. This way, you won’t join the panicking stampede out of stocks and into cash. Instead, you’ll remember that stocks can perform even during a recession – you just need to know which ones. A financial advisorcan help you build an investing plan with a recession in mind.
1. Seek Out Core Sector Stocks.
During a recession, you might be inclined to give up on stocks, but experts say it’s best not to flee equities completely. When the rest of the economy is on shaky ground, there are often a handful of sectors that continue to forge ahead and provide investors with steady returns.
So if you want to insulate yourself during a recession partly with stocks, consider investing in the healthcare, utilities and consumer goods sectors. People are still going to spend money on medical care, household items, electricity and food, regardless of the state of the economy. As a result, these stocks tend to do well during busts (and underperform during booms).
2. Focus on Reliable Dividend Stocks.
Investing in dividend stocks can be a great way to generate passive income. When you’re comparing dividend stocks, some experts say it’s a good idea to look for companies with low debt-to-equity ratiosandstrong balance sheets. If you don’t know where to start, you may want tolook into dividend aristocrats. These are companies that have increased their dividend payouts for at least 25 consecutive years.
3. Consider Buying Real Estate.
The 2008 housing market collapse was a nightmare for homeowners. However, it turned out to be a boon for some real estate investors. When a recession hits and home values drop, it may be a buying opportunity for investment properties. If you can rent out a property to a reliable tenant, you’ll have a steady stream of income while you ride out the recession. Once real estate values start to rise again, you can sell at a profit.
4. Purchase Precious Metal Investments.
Precious metals, like gold or silver, tend to perform well during market slowdowns. But since the demand for these kinds of commodities often increases during recessions, their prices usually go up too. You can invest in precious metals in a few different ways. The most straightforward route is buying coins or bars from a seller or coin dealer. While this is different than buying security, it’s technically as good as any other option.
If you’re more interested in buying precious metal securities, turn your attention to ETFs. These funds are collections of investments within a single industry, which, in this case, is the precious metal market. You could also purchase a gold IRAif you’re saving specifically for retirement.
5. “Invest” in Yourself.
If you lose your job and income during a recession, you can rebound by “investing in yourself.” You could go back to school to gain additional knowledge or skills that could help you get a better job.
Paying down debt is another option if you worry that your job situation might go south at some point. The less money you have to spend on bills, the less stressed you’ll feel during an economic crisis.
Are We Currently in a Recession?
Although the term “recession” is thrown around quite a bit, its actual definition comes from theNational Bureau of Economic Research or NBER. According to its website, the NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” Thus, the NBER is the official institution that determines if the country has actually entered a recession.
As of Feb. 2023, the NBER does not consider the U.S. to be in the midst of a recession. In fact, it hasn’t declared a recession since the 2008-2009 housing crisis. The NBER determines this through a myriad of factors that involve analysis across a wide range of sectors within economic markets. It also accounts for citizen-level data points, like unemployment and personal income.
Bottom Line
If you’re investing for the long term, a looming recession shouldn’t panic you. You may want to offload some investments to take some profits off the table. But for the most part, your strategy should not be to sell when prices are low. You may think you’ll get back in when prices stop falling, but it’s impossible to call a bottom until it passes.
Instead, you should hold the positions that you entered as long-term investments. That said, if you have the cash to invest, you may want to consider buying recession-friendly sectors such as consumer staples, utilities and healthcare. Stocks that have been paying a dividend for many years are also a good choice. These tend to be long-established companies that can withstand a downturn.
Tips for Smart Investing
- If you’re unsure of how to build a portfolio that accounts for a recession, a financial advisor can help.Finding a financial advisor doesn’t have to be hard. SmartAsset’s free toolmatches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A recession has the potential to bring serious losses. That’s why any investing plan starts with understanding how much risk you can tolerate. SmartAsset’sasset allocation calculator considers your risk tolerance to guide you to the optimal portfolio.
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FAQs
During economic downturns or recessions, many investors turn to funds that focus on the consumer staples sector or large-cap companies (companies with a stock market value of $10 billion or more) that tend to generate more stable returns than small-cap companies.
What is the best asset to hold during a recession? ›
Still, here are seven types of investments that could position your portfolio for resilience if recession is on your mind:
- Defensive sector stocks and funds.
- Dividend-paying large-cap stocks.
- Government bonds and top-rated corporate bonds.
- Treasury bonds.
- Gold.
- Real estate.
- Cash and cash equivalents.
During economic downturns or recessions, many investors turn to funds that focus on the consumer staples sector or large-cap companies (companies with a stock market value of $10 billion or more) that tend to generate more stable returns than small-cap companies.
How do you invest wisely during a recession? ›
A good investment strategy during a recession is to look for companies that are maintaining strong balance sheets or steady business models despite the economic headwinds. Some examples of these types of companies include utilities, basic consumer goods conglomerates, and defense stocks.
Where is the safest place to put your money during a recession? ›
The Bottom Line
If you're wondering where to put your money in a recession, consider a high-yield savings account, money market account, CD or bonds. They can provide safe places to store some of your savings. It's worth noting that a recession doesn't mean you should pull all your money out of the stock market.
What gets cheaper during a recession? ›
Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same. In contrast, things considered to be wants instead of needs, such as travel and entertainment, may be more likely to get cheaper.
Is it better to have cash or property in a recession? ›
Cash. Cash is an important asset when it comes to a recession. After all, if you do end up in a situation where you need to pull from your assets, it helps to have a dedicated emergency fund to fall back on, especially if you experience a layoff.
How are millionaires made during recessions? ›
The most important part of building wealth during a recession is investing as much as possible in the stock market. Take steps to ensure you'll have stable income, like starting a side hustle or working on your skills.
What not to do in a recession? ›
What Are the Biggest Risks to Avoid During a Recession? Many types of financial risks are heightened in a recession. This means that you're better off avoiding some risks that you might take in better economic times—such as co-signing a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt.
How can I be financially smart in a recession? ›
Build up your emergency fund, pay off your high-interest debt, do what you can to live within your means, diversify your investments, invest for the long term, be honest with yourself about your risk tolerance, and keep an eye on your credit score.
Avoiding highly indebted companies, high-yield bonds and speculative investments will be important during a recession to ensure your portfolio is not exposed to unnecessary risk. Instead, it's better to focus on high-quality government securities, investment-grade bonds and companies with sound balance sheets.
What stocks do worst in a recession? ›
Equity Sectors
On the negative side, energy and infrastructure stocks have been the hardest-hit in recent recessions. Companies in these sectors are acutely sensitive to swings in demand. Financials stocks also can suffer during recessions because of a rising default rate and shrinking net interest margins.
What sectors thrive in a recession? ›
There are also fundamental services that consumers can't do without, even in hard times.
- Accountants. ...
- Healthcare Providers. ...
- Financial Advisors and Economists. ...
- Auto Repair and Maintenance. ...
- Home Maintenance Stores. ...
- Home Staging Experts. ...
- Rental Agents and Property Management Companies. ...
- Grocery Stores.
The short answer is no. Banks cannot take your money without your permission, at least not legally. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder, per bank. If the bank fails, you will return your money to the insured limit.
How to profit during a recession? ›
5 Things to Invest in When a Recession Hits
- Focus on Reliable Dividend Stocks. Investing in dividend stocks can be a great way to generate passive income. ...
- Consider Buying Real Estate.
- Purchase Precious Metal Investments.
- “Invest” in Yourself. ...
- Are We Currently in a Recession? ...
- Bottom Line.
- Tips for Smart Investing.
Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution. What happens if my bank fails during a recession?
How much cash should you hold in a recession? ›
Finance Experts All Say the Same Thing
They all said the same thing: You need three to six months' worth of living expenses in an easily accessible savings account. The exact amount of cash needed depends on one's income tier and cost of living.
Where does money go during a recession? ›
During recessions, one of the primary culprits responsible for money vanishing into thin air is the collapse of banks. As financial institutions crumble under the weight of bad loans and dwindling assets, they often go belly up, taking the money entrusted to them along for the ride.
How do I protect my money in a recession? ›
The Bottom Line
Build up your emergency fund, pay off your high-interest debt, do what you can to live within your means, diversify your investments, invest for the long term, be honest with yourself about your risk tolerance, and keep an eye on your credit score.
What is a recession-proof investment? ›
“Recession proof” is a term used to describe an asset, company, industry, or other entity that is believed to be economically resistant to the effects of a recession. Recession-proof stocks are added to investment portfolios to safeguard them against times of economic decline, which may be the onset of a recession.
