What To Invest in During a Recession: Smart Strategies for Tough Times

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During a recession, it’s natural to look for risk-free ways to protect and grow your money. But while no investment is ever truly without risk, there are ways to help you weather economic downturns. Learn more about what to invest in during a recession so you can bolster your portfolio and reduce risk.

Key Takeaways

• Investing in defensive sectors can help shield your portfolio from volatility.
• Diversify your portfolio with a mix of asset classes, and a mix of sectors within those classes.
• Avoid panic selling — you could lose money in the long run by missing out on the eventual market recovery.

Safe Investments for a Recession

The chances of a recession happening in the next 12 months are 53% to 63% based on Treasury security data analyzed by the Federal Reserve Bank of New York. Choosing a few safe investments could protect your portfolio if a recession does occur. 

Here are some safe recession investments to consider.

Government Bonds

When you purchase a government bond, you’re essentially lending money to a state or local government, a government agency or the federal government. In exchange, your investment earns interest. When the bond matures, you receive the original amount back. 

High-Yield Savings

High-yield savings accounts have much higher yields than traditional savings accounts — often 3.5% to 4.5%, compared to an average of just 0.40%, according to the FDIC, for regular savings accounts. 

Money Market Accounts

MMAs generally offer more features than savings accounts, including check writing and bill pay. The average rate is 0.59%, but you can find high-yield money market accounts with higher rates.

Defensive Stocks and Sectors

Companies in defensive stock sectors produce products and services with high consumer demand regardless of economic conditions. Here are some key points to know:

• Consumer staples: These companies provide essential goods like food or cleaning products. 
• Utilities and energy: There’s steady demand for water, electricity, etc. — even in a recession. 
• Healthcare: Even when the economy takes a dip, healthcare services are always necessary. 
• Communication: Companies that provide wireless and other communication services are also defensive.

Here are some examples of defensive stocks likely to provide stability during a recession, based on their performance during past recessions:

Dividend-Paying Stocks

Dividend stocks give investors a steady source of income during uncertain times. The dividends can be reinvested for continuous growth over the long term.

Top industries for dividend-paying stocks include:

• REITs: REITs own and operate real estate or mortgage debt. They pay out 90% of their income as dividends to shareholders.
• Telecom companies: Companies like AT&T, T-Mobile and Comcast offer stocks that pay out in regular dividends.
• Large, stable companies: Blue-chip companies that have regularly increased their dividends tend to be a safer investment.

Precious Metals

Precious metals like gold or silver often hold their value during economic downturns. However, they can be volatile, so invest for the long term and limit your exposure to a small percentage of your portfolio.

Here are a few ways to invest in precious metals:

• Physical metals: You can purchase coins or bullion. You’ll need a secure place to store them. Compare prices from different sellers to get the best value.
• Stocks: Mining stocks are another way to invest. They also carry their share of risks, though they sometimes outperform the market during recessions.
• Futures contracts: You can invest in precious metals by purchasing a contract to buy for sell at a specific price on a future date. Market swings can result in major gains or losses.
• ETFs: Some exchange-traded funds hold physical gold or futures contracts. ETFs come with their own fees and risks.

ETFs

With ETFs, investors pool their money into a collection of stocks, bonds and other assets. They can then earn interest or dividends off that investment.

ETFs offer diversification with lower risk during a recession, but are still subject to market risk. 

Types of recession-resistant ETFs to consider include:

• Sector ETFs: These give investors access to a small percentage of the overall market. Common sectors include healthcare, utilities, real estate and energy. 
• Dividend ETFs: Dividend ETFs can be more diversified than sector ETFs.
• Bonds ETFs: Bond ETFs earn interest and often include hundreds or thousands of individual bonds, which reduces risk and boosts portfolio stability.

Real Estate and REITs

Real estate can be a solid investment during a recession. Depending on how you go about it, you could see some real long-term growth.

Types of real estate investments include:

• Rental properties: Purchasing rental properties gives you the opportunity for steady income. You’ll need to manage leasing and maintenance or pay a property management company to do it for you.
• REITs: You can invest in publicly-traded REITs on a major stock exchange or purchase non-traded REITs shares via a broker.

Good To Know

With direct real estate investing, you own the property. With REIT investing, you own shares in a company that owns real estate. And with a REIT ETF or mutual fund, you own shares in the fund.

Emergency Funds

An emergency fund can help keep you afloat when you have unexpected expenses, lose your job or suffer some other setback.

Experts say you should have three to six months’ worth of expenses in a separate account from your regular checking and savings.

Strategies for Minimizing Risk During a Recession

You can’t eliminate risk. But you can minimize it.

Recession-proof investing starts with determining your short- and long-term financial goals. Ask yourself:

• What are your current financial needs?
• How much cash do I need quick access to?
• Is my current line of work and income stable?
• Do I anticipate an uptick in expenses?

Here are a few tips to minimize risk:

• Portfolio diversification: Spread investments across asset classes, and across sectors/industries within those asset classes. Prioritize liquid investments during uncertain times.
• Dollar-cost averaging: Dollar-cost averaging entails investing according to a regular schedule, such as monthly or quarterly. The idea is to purchase more shares when the market is low, thus spreading out risk and reducing overall cost per share.
• Avoid panic selling: Stay calm and focused on your long-term goals during market downturns. 

The Bottom Line

When it comes to knowing what to invest in during a recession, the answer is highly subjective. After all, every investor’s goals, needs and risk tolerance is different.

If your risk tolerance is low, consider:

• Government bonds
• High-yield savings accounts
• High-yield money market accounts

For moderate risk but more growth potential, consider:

• Defensive stocks
• Sector ETFs
• REITS

Hedge assets like the following diversify your portfolio:

• Precious medals
• Diversified ETFs

Start small and focus on the long-term. When in doubt, speak with an investment professional who has your best interests in mind and can help guide you along the way.

Angela Mae Watson contributed to the reporting for this article.

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