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
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.
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.
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.
What will be valuable if the economy collapses? ›
A physical asset that appreciates will always be valuable in a stock market crash. The most valuable assets in this situation include items like artwork, cars, jewelry, and other collectibles. Physical gold is another valuable asset that can be used as a safe haven in times of economic turmoil.
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.
How to build wealth 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.
Cash: Offers liquidity, allowing you to cover expenses or seize investment opportunities. Property: Can provide rental income and potential long-term appreciation, but selling might be difficult during an economic downturn.
What not to invest in before a recession? ›
Strategic investing.
During a crisis or recession, you may want to avoid investments in companies or industries that are known to be cyclical, speculative, or high risk, such as unproven startups, hospitality services, and manufacturers, and retailers of luxury consumer goods.
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 stocks to buy during a recession? ›
The best recession stocks include consumer staples, utilities and healthcare companies, all of which produce goods and services that consumers can't do without, no matter how bad the economy gets.
What to Own When the Dollar Collapses. Historically, tangible assets like gold and real estate have been sought after as they tend to retain intrinsic value. Investing in commodities such as precious metals, oil, and agricultural products is also considered a smart choice.
What to do before the US dollar collapses? ›
Though the U.S. dollar collapsing is unlikely, ways to hedge against it include purchasing the currencies of other nations, investing in mutual funds and exchange-traded funds (ETFs) based in other countries, and purchasing the shares of domestic stocks that have large international operations.
What do people spend money on in a recession? ›
Toothpaste, deodorant, shampoo, toilet paper, and other grooming and personal care items are always in demand. Offering these types of items can position your business as a vital resource for consumers during tough times. People want to look good, even when times are tough.
Can banks seize your money if the economy fails? ›
It indicates an expandable section or menu, or sometimes previous / next navigation options. 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.
Do you hold cash 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.
What is the best portfolio for a recession? ›
How to Recession-Proof Your Portfolio
- Diversification of Your Investments. You've heard the saying, don't put all your eggs in one basket. ...
- Invest in Real Estate. Buying up all the real estate during a recession might be tempting. ...
- Buy Shares in Defensive Sector Funds. ...
- Consider Precious Metals. ...
- Build An Emergency Fund.
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.
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.
Is cash king in a recession? ›
It will give them the funds to buy stocks or other assets during the decline. Because of how precious cash can be during times of financial stress, many have said that cash is king. The phrase means that having liquid funds available can be vital because of the flexibility it provides during a crisis.
