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If you know what to look for, investing during a recession doesn’t have to be unsettling. Advertisement.
This article will analyze the best investments to own during a recession drawing insights from two reputable sources:
- Morningstar’s “Best Investments to Own During a Recession”
- SmartAsset’s “5 Things to Invest in When a Recession Hits”
Key Considerations for Investing During a Recession
Before diving into specific investments, it’s crucial to understand the key factors that influence market behavior during a recession:
- Economic slowdown: Economic activity declines, leading to lower corporate earnings and potentially higher unemployment.
- Investor sentiment: Fear and uncertainty can drive investors to sell stocks, leading to market volatility.
- Interest rate changes: The Federal Reserve may cut interest rates to stimulate the economy, impacting bond yields.
Best Investments During a Recession
Based on the analysis of the provided sources, here are the top investments to consider during a recession:
1. Cash and Cash Equivalents:
- Advantages: Provides liquidity and safety, especially when markets are volatile.
- Disadvantages: Low returns, particularly in an inflationary environment.
- Suitable for: Investors seeking capital preservation and short-term liquidity.
2. Large-Cap Stocks:
- Advantages: Larger companies tend to be more resilient during recessions due to their diversified businesses, stable earnings, and financial resources.
- Disadvantages: May not offer the same growth potential as smaller companies during economic expansions.
- Suitable for: Investors seeking a balance between stability and growth potential.
3. Gold:
- Advantages: Historically a safe haven asset during periods of economic uncertainty, offering inflation protection.
- Disadvantages: Can be volatile in the short term and may not generate significant returns.
- Suitable for: Investors seeking portfolio diversification and a hedge against inflation.
4. Dividend Stocks:
- Advantages: Provide a stream of income during a recession, which can help offset market volatility.
- Disadvantages: May be less resilient during severe economic downturns if companies are forced to cut dividends.
- Suitable for: Investors seeking income and capital appreciation over the long term.
5. Consumer Staples Stocks:
- Advantages: Companies in this sector provide essential goods and services that consumers need regardless of the economic climate.
- Disadvantages: May not offer high growth potential.
- Suitable for: Investors seeking stability and income during a recession.
6. Utilities Stocks:
- Advantages: Provide essential services like electricity and water, making them relatively recession-proof.
- Disadvantages: May not offer high growth potential.
- Suitable for: Investors seeking stable income and capital preservation.
7. Healthcare Stocks:
- Advantages: People still need healthcare services during a recession, making this sector relatively resilient.
- Disadvantages: May be sensitive to government regulations and policy changes.
- Suitable for: Investors seeking long-term growth potential in a relatively stable sector.
Other Considerations
- Investing in Real Estate: Real estate can be a good long-term investment, but it’s important to carefully consider the risks involved, especially during a recession.
- Precious Metals: Gold and other precious metals can be a hedge against inflation, but their prices can be volatile.
- Investing in Yourself: During a recession, it can be a good time to invest in your skills and education to improve your job prospects.
While there is no guarantee of success, these investments have historically performed better during recessions. By understanding the key factors that influence market behavior during economic downturns and carefully selecting investments that align with your risk tolerance and financial goals, you can increase your chances of weathering a recession successfully.
Disclaimer
This article is for informational purposes only and should not be considered financial advice. Please consult with a qualified financial advisor before making any investment decisions.
4 investments to consider during a recession
Certain investments typically perform better than others during recessions, even though no investment is guaranteed to be recession-proof. These include:
- Health care and consumer staples stocks
- Large-cap stocks
- Funds that track specific sectors
- Fixed-income investments
Learn more about each specific type below.
Health care and consumer staples stocks
Sectors comprise businesses that list their shares for sale on the stock exchange. There are a total of 11 sectors, which are divisions based on the kind of business the company conducts:
- Communication services.
- Consumer discretionary.
- Consumer staples.
- Energy.
- Financials.
- Health care.
- Industrials.
- Information technology.
- Materials.
- Real estate.
- Utilities.
Certain economic sectors typically perform better than others during a recession as consumer demands change. Certified financial planner Delia Fernandez, of Fernandez Financial Advisory in Los Alamitos, California, says the consumer staples and health care industries are two instances of this.
The “Is Healthcare Employment Resilient and Recession Proof” study from 2021 discovered that hiring in the health care industry stayed steady despite economic downturns. National Bureau of Economic Research . Is Healthcare Employment Resilient and “Recession Proof”?. Accessed Sep 22, 2022. View all sources.
The health-care sector includes biotech and pharmaceutical companies. The consumer staples sector comprises tobacco and alcohol as well as food and drink, household goods, and personal items.
If you don’t currently have a brokerage, check out our list of the top online brokerages.
In the rebound and recovery phase of a recession, these sectors usually don’t see the kind of rapid growth that other industries, like consumer discretionary (household goods and services that are considered more wants than needs, like apparel, restaurants, and luxury items), or information technology, might.
“In any downturn environment, we often look at consumer staples. Fernandez states, “And those are the standard items we purchase, along with the retailers from which we get them. “Because you have to eat and drink, you have to buy toilet paper, and you will eventually have to visit the doctor.” ”.
Known as “defensive stocks,” these stocks might not be as appealing in bull markets or other boom times. However, Fernandez suggests that during bear markets and recessions, it might be a good idea to reevaluate and give some thought to the businesses that offer products that are universally purchased.
» Learn more about what a recession is.
“Don’t Keep Your Cash In The Bank”: 6 Assets That Are Better & Safer Than Cash
FAQ
What assets are good to own during a recession?
What are the best assets in times of crisis?
What is the safest investment in a recession?
Is it better to have cash or property in a recession?
What are the best investments if a recession is on your mind?
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.
Which asset class is best during a recession?
Because of their higher level of sensitivity to interest rates, long-term bonds have historically fared best during recessions, although intermediate-term bonds and cash have also been pretty resilient. Gold has also been a winning asset class during recessionary periods, with positive returns during the eight most recent recessions since 1993.
Should you invest in an emergency fund during a recession?
An emergency fund can be especially helpful during the economic uncertainty of a recession. Not only can it help tide you over, but it can also help you stay invested, giving your investments time to rise again. You don’t want to have to touch your investments in the middle of a recession just to pay your bills.
What is the best way to invest during a recession?
Often, the best way to invest during a recession is just what you’ve already been doing.