As you work diligently to build a healthy financial strategy for you and your family, it can be discouraging to think of a recession sidelining your progress. The market volatility that often comes with a recession can feel like a threat to your plans. But in actuality, recessions usually only last around 10 months.
As the economy ebbs and flows, you can make thoughtful choices about what to invest in during a recession. Some investments tend to perform more reliably than others in turbulent times, and spreading your money across different asset types also can help to balance your risks.
Six types of investments to consider during a recession
Choosing what to invest in during a recession depends on a few factors, such as your financial goals, time horizon and risk tolerance. You'll want to match your needs with investment qualities that tend to hold up even in downward economic times—features like historically reliable returns, connections to essential industries or commodities that tend to stay in demand.
While it's important to not derail your longer-term investing goals by making large changes to your investment mix, you may consider how these various investment types can help meet your financial goals:
Stocks often decline in tough economic times, so it can be tempting to cash out when a recession is looming. However, timing the market is notoriously difficult. Instead, you might just shift the focus of your stocks.
For instance, growth stocks in sectors like technology are considered riskier than high-quality stocks, which are more consistently profitable and may have more stable performance. These stocks tend to be utilities, consumer staples companies and real estate—industries that are essential regardless of economic activity.
Dividend stocks are also relatively consistent. These provide investors with earnings distributions from corporations—usually large, well-established ones—in periodic payments that can be received as income or used to automatically buy new shares.
Bonds can provide a steady source of income and have the potential for price appreciation during a recession. They work like certificates of deposit (CDs) in that they earn a fixed rate of interest over a specified term, but they range much longer—up to 30 years.
Bond prices generally move in the opposite direction as interest rates. This is why they often rise during a recession, when the Federal Reserve may lower interest rates to stimulate the economy. However, lower-quality, high-yield bonds issued by less stable companies may not perform as well as higher-quality, investment-grade bonds in a recessionary environment.
Index funds and exchange-traded funds (ETFs) are designed to passively track the overall performance of a benchmark index, such as the S&P 500. These investments can give you low-cost exposure to a broad segment of the market, providing some of the benefits of diversification, such as reducing risk and balancing volatility.
Real estate is a tangible asset that can provide you with a steady stream of income through rental payments. Recessions can increase demand for rental properties as people look for more affordable housing options. Or, rather than owning physical property, you may want to invest in real estate investment trusts (REITs). These entities operate apartment and office buildings, shopping centers, hotels and other properties that tend to consistently generate income and withstand recessions.
When considering how to invest during a recession, some raw materials, such as gold and precious metals, could be safe havens. Historically, commodities like these have shown low or negative correlations with assets like stocks and bonds, which means having them in your portfolio could help you balance risk across time. Just bear in mind that industrial metals, like copper, may experience price weakness during periods of slowing economic activity.
6. High-yield savings accounts
Savings accounts that offer above-average interest rates can help you safeguard your cash during a recession. Economic downturns may tempt you to hoard your money, which is fair if you need it to be easily accessible in case something happens. Accounts like these allow you to have that liquidity while also earning modest interest. It's a solid option for holding your emergency funds or short-term-goals stockpile.
The importance of diversification
These securities and assets are common recession investments, and many investors find that crafting a portfolio that mixes them is even more ideal. When you have money in multiple asset classes, you potentially can offset losses in one area with gains in another. Holding bonds and stocks together, for example, combines the possibilities of income from dividends and long-term growth. Or you may want the stability of a savings account while you dabble in ETFs.
Regardless of the combination, the idea behind diversification is that it can reduce your overall investment volatility and stabilize your long-term returns. To maintain its effectiveness, you should check on and rebalance your portfolio periodically—at least once per year.
Getting help with recession investments
Recessions can rattle even seasoned investors, but you can take actions that help position your money to endure. If there are signs of a downturn on the way, consider it an opportunity to reflect on your investment strategy and make moves to shore it up.
A financial advisor can help you set realistic expectations with the economy in mind while also prioritizing your long-term financial goals.
