The yield curve has been inverted since July 2022, which has frequently preceded recessionary periods. Investors are betting that economic weakness will result in lower yields for long-term bonds, which is why the market has been anticipating a recession for quite some time. So far, a recession hasn’t materialized. The economy has continued to grow, as evidenced by the largely positive corporate earnings reports and the unemployment rate remaining near record lows.
However, even though one isn’t happening right now, one will eventually occur. The economy operates in cycles, with expansions followed by downturns and vice versa. Recessions, which are typically characterized by at least two quarters of declining GDP growth, have historically happened roughly once every five to ten years, though the intervals between recessions can vary in duration.
It is impossible to forecast when or how bad a potential recession will be. Furthermore, a recession is frequently only evident after the fact or after the market has already begun to respond negatively to slower economic growth.
However, examining the kinds of investments that have typically performed the best during recessions can assist you in minimizing some of the harm. I’ll examine investing during a recession from a variety of perspectives in this post, including asset classes, variables, and industries. (Note: Since performance data for earlier periods is more difficult to come by, I will be concentrating most of this analysis on the last four or five recessions.) ).
When it comes to asset classes, stocks are typically among the worst places to be during a recession. The explanation is straightforward: Economic activity declines during recessions, and these declines are typically accompanied by weaker trends in revenue and earnings growth. Companies’ stock prices typically decline when they generate less positive results.
Because of this, during the majority of prior recessions, ranging back to the Great Depression, stocks had negative returns. A few of the most unfavorable outcomes occurred during the global financial crisis, as stocks lost an annualized 20%24 between late 2007 and mid 2009.
In times of economic uncertainty, investors often seek refuge in “safe haven” assets that hold their value or even increase in value during market downturns. While there’s no single “best” asset for every crisis, certain asset classes and specific investments tend to perform better than others during turbulent times. This guide explores the best assets to own in a crisis, providing insights into recession-proof investments and strategies to navigate market volatility.
Understanding Crisis Investing: Risk, Reward, and Diversification
Navigating turbulent markets requires a nuanced approach that balances risk and reward. While some investors may seek the security of “safe haven” assets, others may explore high-risk high-reward opportunities. Diversification plays a crucial role in mitigating risk and ensuring a well-balanced portfolio that can weather economic storms.
Key Considerations:
- Risk Tolerance: Determine your risk tolerance and align your investment strategy accordingly.
- Investment Horizon: Consider your investment horizon and choose assets that fit your long-term goals.
- Market Conditions: Analyze current market conditions and identify sectors and industries that are likely to perform well during a crisis.
Top Asset Classes for Crisis Investing:
1. Cash:
- Liquidity: Cash offers unparalleled liquidity, allowing you to access funds quickly in times of need.
- Emergency Fund: Maintain an emergency fund equivalent to 3-6 months of living expenses to cover unexpected expenses during a crisis.
- High-Yield Savings Accounts: Consider high-yield savings accounts insured by the FDIC to earn interest on your cash reserves.
2. Large-Cap Stocks:
- Stability: Large-cap stocks of well-established companies with stable cash flow and pricing power tend to perform well during recessions.
- Consumer Staples: Focus on sectors like food, personal care products, healthcare, and utilities, as these companies provide essential goods and services that consumers continue to purchase regardless of economic conditions.
- Dividend-Paying Stocks: Consider dividend-paying stocks to generate passive income during a crisis.
3. Gold:
- Historical Performance: Gold has historically served as a safe haven asset during economic downturns, often increasing in value when other assets decline.
- Inflation Hedge: Gold acts as an inflation hedge, protecting your purchasing power during periods of rising prices.
- Physical Gold: Consider investing in physical gold bars or coins for added security and control over your assets.
4. Bonds:
- Fixed Income: Bonds provide a steady stream of income in the form of interest payments, offering stability during market volatility.
- Government Bonds: Government bonds, especially those issued by developed countries, are considered low-risk investments with a high degree of safety.
- Treasury Inflation-Protected Securities (TIPS): TIPS adjust their principal value based on inflation, protecting your investment from the eroding effects of rising prices.
5. Real Estate:
- Tangible Asset: Real estate offers tangible ownership and potential for long-term appreciation.
- Rental Income: Rental properties can provide a steady stream of passive income, offering financial security during a crisis.
- Location and Property Type: Focus on desirable locations with strong rental demand and consider investing in properties that are less susceptible to economic downturns, such as single-family homes or multi-unit buildings.
Additional Considerations for Crisis Investing:
- Cyclical Stocks: Avoid cyclical stocks of companies whose profits are highly correlated with the overall economy, as these tend to perform poorly during recessions.
- Cryptocurrency: Exercise caution with cryptocurrency, as it is a highly speculative and volatile asset class that may not provide stability during a crisis.
- Long-Term Perspective: Maintain a long-term investment horizon and avoid making impulsive decisions based on short-term market fluctuations.
- Professional Guidance: Consult with a qualified financial advisor to develop a personalized investment strategy that aligns with your risk tolerance, goals, and financial situation.
By understanding the best assets to own in a crisis and implementing a well-diversified investment strategy, you can navigate market volatility with greater confidence and protect your financial well-being during turbulent times.
Disclaimer: This information is for educational purposes only and should not be considered financial advice. Please consult with a qualified financial professional before making any investment decisions.
Total Returns (%) by Sector
Technology and communications stocks have a mixed record. The communications and technology sectors fared reasonably well during the 1990–1991 recession, which was accompanied by problems with the Gulf War and the supply of oil. Tech giants like Microsoft MSFT, Apple AAPL, and International Business Machines IBM continued to produce double-digit returns. The tech bubble eventually burst in 2000 after soaring for the most of the 1990s, and there was a brief recession in 2001. The communications and technology sectors experienced the greatest losses due to valuations that were still inflated prior to the recession.
Does the prospect of a looming recession mean you should overhaul your portfolio? No. In fact, making wholesale shifts in portfolio holdings is usually a bad idea. But just like being mentally prepared for winter in Chicago can help longtime residents like me survive the tough season ahead, studying how the market has historically performed can help you set expectations for how your holdings might react if and when the economy weakens. Can You Recession-Proof Your Portfolio?
Shares of one or more of the securities mentioned in this article are owned by the author or authors. Find out about Morningstar’s editorial policies.
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Top 3 Assets To Buy Going In To A Recession
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