When uncertainty looms on the economic horizon, investors try to future-proof their portfolios with investments that can stand the test of time. A recession investment strategy can help shield your portfolio from a massive hit, but unfortunately, no foolproof solutions exist. No investment will be a guaranteed win, especially during a recession.
However, some are more stable and allow you to come out the other side better off than before.
So, where should you allocate your resources, and what is the best investment during a recession? These seven investments can help protect your portfolio and financial resources as best you can.
First, Get into the Right Mindset
Before we get into the specifics of investments you can make in tumultuous economic times, you need the right mindset for your strategy to be effective.
Remember to always stick to the fundamentals of investing, such as asset allocation and diversification. If you have an investment advisor, lean on their expertise to help you avoid hasty decisions.
One of the most important investments you can make is in yourself and your emotional or mental stability, despite fear and uncertainty. If you are worried about how your portfolio will do, take this time to learn, prepare, and remain emotionally stable. Impulsive sell-offs based on fear could devastate your portfolio and make it difficult to recover.
Finally, don’t try to predict market timing. It shares many similarities to gambling in Vegas, and while you may “win” sometimes, it’s not a safe or reliable way to grow your wealth.
1. U.S. Treasury Bonds
The first possible recession investment strategy is U.S. Treasury bonds. These bonds are backed by the federal government, which has historically acted as a safe haven when equity markets fall. This can give peace of mind and stabilize a diversified portfolio.
One tip is to balance your mix of short‑ and long‑term maturities to manage interest‑rate sensitivity (duration risk).
2. Dividend-Paying Stocks
Markets with a downward trend make people hold more tightly to their income. Dividend-paying stocks can be a great option because they yield routine payments when the company performs well. If you make a smart choice to invest in companies with a track record of routine dividends in all markets, they can deliver income even if share prices are under pressure.
That said, in severe downturns, dividends may be reduced or suspended. Focus on firms with low payout ratios, strong cash flow, and healthy balance sheets. Before making any investments, review the historical consistency of dividend payments over multiple market cycles.
3. Stocks
Stocks in general can be a strategic option in a recession. Investors can scoop up shares at lower valuations, knowing that boom and bust cycles are natural for the economy.
Our tip here is to diversify across market capitalizations. Large-cap stocks tend to be less sensitive to market volatility, while small-cap stocks can rebound strongly during economic recovery. There are advantages to both in a diverse portfolio. Simply “buying the dip” can backfire if a company’s fundamentals are deteriorating.
4. Corporate Bonds
Corporate bonds or investment-grade bonds can be another less risky option for recessions. These loans to companies yield predetermined interest payments (often higher than Treasuries) and can protect your capital within your portfolio. Corporate bonds can create a steady income stream with yields slightly above cash investments, even if other assets like stocks are losing value.
Like all bonds, however, they are sensitive to interest rates the longer the term of the bond. When interest rates are lower than your bond rate, your bond may be selling at a premium. But, of course, the opposite is true as well.
5. Gold and Commodities
Gold might be your answer if you want an investment that has stood the test of time regarding market volatility. Most investors worry about the impacts of inflation, which is when it is prime time to invest in gold for safekeeping. It acts as a hedge in your portfolio and can accelerate beyond other investments in uncertain financial times.
As with anything, moderation and diversification are key. While gold can outperform during sharp equity declines, it may lag in early recovery phases.
6. ETFs and Mutual Funds
Not sure you want to risk picking a stock that might not perform in a volatile market? Instead of handpicking stocks, consider investing in pooled vehicles like ETFs and mutual funds. It goes back to the age-old best practice of investing: diversification.
For example, you could invest in ETFs that follow healthcare, consumer staples, or utilities. These are often called defensive sector ETFs because they tend to outperform other areas in a market downturn. Most people must continue to purchase items in these categories, like toothpaste and cereal, so they can help balance risk and return.
7. Cash and Cash Equivalents
Every portfolio should maintain some small amount of cash and cash equivalents such as money market funds, treasury bills, certificates of deposit (CDs), and high-yield savings accounts. You will want to have some liquid funds for purchases that will hold steady without the risk of market volatility. For example, you do not want to be forced to dip into your investments when your car breaks down during a recession.
Wise investors know they should keep 3 to 6 months’ worth of expenses in cash or cash equivalents at any given time, recession or not. You might need more money than you think to weather the downturn. Selling off investments and dipping into your portfolio to cover living expenses is typically ill-advised and can do more harm than good when you have to sell at depressed prices.
Another reason to keep some liquid cash around is for any opportunities that might pop up. Remember when the price of oil went negative? Talk about an opportunity!
Expert Advice to Help You Keep A Clear Head
Are you ready to start thinking about your recession investment strategy? While the investments listed here are a great starting point, there are no cookie-cutter answers to how to invest in any market, but maybe especially during tough economic times. You need to be savvy now to reap all of the benefits later.
Magellan can help you make wiser decisions about your investment strategy with comprehensive estate, financial, legal, and tax planning with an emphasis on charitable giving strategies. Reach out to us today to book your consultation and see if our services are a fit for you!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.
The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value.
The return and principal value of stocks fluctuate with changes in market conditions. Shares when sold may be worth more or less than their original cost.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
Bank certificate of deposits are insured by an agency of the Federal government and offer a fixed rate of return whereas both the principal and yield of investment securities will fluctuate with changes in market conditions.
Cetera does not offer direct investments in gold/silver (commodities). Commodities are volatile investments and may not be suitable for all investors.
Investors should consider the investment objectives, risks and charges and expenses of the fund carefully before investing. The prospectus contains this and other information about the funds. Contact the issuing firm to obtain a prospectus which should be read carefully before investing or sending money.