5 Investments That Lose Value in a Recession
Written by
Elizabeth Constantineau, AI Editor
Edited by
Elizabeth Constantineau
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During economic downturns, it’s vital to grasp how different types of investments behave. A recession can have a notable effect on the value of various investments, with some being more affected than others. By understanding this, investors can make smarter choices, potentially protecting their portfolios from substantial losses. Keep reading to learn more.
Recession Risks: 5 Investments To Watch Out For
Recessions bring with them a wave of economic uncertainties that can adversely affect certain investments. While no investment is completely recession-proof, some are more susceptible to losing value during these challenging times. Here’s a look at some of these investments.
1. High-Risk Stocks
High-risk stocks, especially in unpredictable industries or financially shaky companies, often lose value in a recession. For example, stocks in tech startups or new energy companies can be risky. Investors usually shift their money to safer options, which lowers demand and the price of these high-risk stocks.
2. Luxury Goods Stocks
Companies dealing in luxury goods usually experience a drop in demand during a recession as consumers cut back on non-essential spending. This reduced demand can lead to a decline in the stock value of luxury brands.
3. Real Estate Investments
The real estate market often takes a hit during economic downturns. Property values can decrease, and rental income may fall, impacting both real estate stocks and physical real estate investments.
4. Unsecured Consumer Debt Securities
Investments in unsecured consumer debt, like credit card debt or personal loans, can be risky during a recession. Higher unemployment rates lead to increased default rates, diminishing the value of these securities.
5. Cyclical Stocks
Cyclical stocks, or those tied closely to economic cycles, such as automotive or travel industries, are often among the hardest hit during a recession. As consumer spending decreases, so does the performance of these stocks.
Best Investments During a Recession
In contrast to riskier options, certain investments tend to hold up well during recessions. These include the following:
- Government bonds
- Utility company stocks
- Consumer staples stocks
These options provide a foundation of steadiness and security, serving as wise selections for maintaining a well-rounded investment portfolio during challenging economic periods.
Performance of Gold in a Recession
Does gold lose value in a recession? Typically, gold is seen as a safe-haven asset during economic downturns. Unlike many investments, gold often retains its value or even appreciates during recessions.
This stability makes gold investing a popular choice for those looking to diversify their portfolios in uncertain times.
Final Take
Understanding which investments are prone to losing value in a recession is key to making informed investment decisions. While diversification is essential, being aware of the risks associated with certain types of investments, such as high-risk stocks or real estate, can help in navigating economic downturns more effectively.
FAQ
Here are the answers to some of the most frequently asked questions about investing during a recession.- What is the best investment during a recession?
- The best investment during a recession is typically in sectors that are considered defensive or essential, such as healthcare, consumer staples and utilities. These industries tend to remain stable because they offer products and services that people need regardless of the economy's state.
- Where is the safest place to put your money during a recession?
- The safest place to put your money during a recession is in high-quality, low-risk investments like treasury bonds, FDIC-insured savings accounts and money market funds. These options provide stability and are less likely to lose value during economic downturns.
- Is gold good to have during a recession?
- Yes, gold is often considered a good asset to have during a recession. Historically, gold has maintained its value or even increased in price during economic downturns. Its stability contrasts with the performance of many other investments, making gold a popular choice for diversifying portfolios during uncertain economic times.
- Will gold ever lose its value?
- While the value of gold can fluctuate based on market conditions, it is unlikely to ever lose its value completely. Gold's enduring value is tied to its physical properties, historical significance and its perceived status as a store of wealth. While not immune to price fluctuations, gold's intrinsic value provides a level of security over the long term.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
