Recessions are inevitable in the economic cycle, characterized by a decline in economic activity, rising unemployment, and falling stock prices. They can be challenging, but they also present unique opportunities for savvy investors who know what to invest in during a recession. In this article, we will explore 4 recession proof investments that can help protect your money during tough economic times, covering recession proof stocks, industries, and assets.
During a recession, it’s essential to have a diversified portfolio of recession proof investments that can help protect your money from market volatility. A recession proof investment is one that performs well during an economic downturn, providing stability and security for investors. Such investments tend to fall into specific categories, such as real estate, precious metals, dividend-paying stocks, healthcare, and utilities. Investing in recession proof stocks and industries can help safeguard your money, even when the economy is struggling.
What Happens In A Recession?
A recession is a period of economic decline characterized by a decrease in gross domestic product (GDP), rising unemployment, and falling stock prices. During a recession, businesses and consumers spend less money, which leads to a decrease in demand for goods and services. As a result, companies may reduce their production, cut jobs, or go bankrupt. This leads to higher levels of unemployment, lower consumer spending, and a decrease in tax revenue for the government.
The stock market also tends to decline during a recession, as investors become more risk-averse and sell their stocks in favor of safer assets like bonds and cash. This can lead to a downward spiral, as falling stock prices can cause further declines in consumer confidence and spending.
Overall, a recession can be a challenging time for individuals and businesses alike. However, by investing in recession-proof industries and diversifying their portfolios, investors can help protect their money during tough economic times.
What To Invest In During A Recession
When considering what to invest in during a recession, the following 4 types of assets could be considered as part of a diversified portfolio of investments;
Residential Real Estate Investments
Residential property investments may be considered relatively recession proof because people will always need a place to live, regardless of economic conditions. During a recession, many people may opt to rent rather than buy a home, which can increase demand for rental properties. Additionally, owning rental properties can provide a steady stream of rental income that can help offset any losses from other investments.
On the other hand, commercial property investments may be more susceptible to the effects of a recession. During a recession, many businesses may experience financial difficulties and may need to downsize or even close their doors. This can lead to increased vacancies in commercial properties, which can lower rental income for property owners. Additionally, commercial properties may be more difficult to lease or sell during a recession, which can make it challenging to liquidate your investment if needed.
It’s important to note that not all commercial properties may be affected equally during a recession. For example, properties that are leased to essential businesses, such as grocery stores or medical offices, may be less affected than properties leased to non-essential businesses, such as restaurants or retail stores.
Additionally, real estate investment trusts (REITs) offer investors the chance to invest in income-producing real estate without owning or managing properties. REITs are a great way to invest in all types of properties, such as office buildings, apartments, and shopping centers, that offer the potential for high yields and stable cash flow.
Gold and other precious metals are often considered safe-haven investments during a recession. This is because they are tangible assets that have intrinsic value and are not subject to the same fluctuations as currency or stocks. During a recession, investors may flock to precious metals as a way to preserve their wealth and hedge against inflation.
Gold, in particular, has a long history of being used as a store of value and a safe-haven asset. It has a relatively low correlation to other assets, which can make it a good way to diversify a portfolio. In addition, gold has a number of industrial uses, such as in electronics and jewelry, which can help support demand for the metal even during a recession.
Other precious metals, such as silver, platinum, and palladium, can also be good investments during a recession. However, these metals are often more heavily tied to industrial demand than gold. For example, silver is used in a variety of industrial applications, including solar panels and electronics, which can impact its price during a recession. Platinum and palladium are used primarily in the automotive industry for catalytic converters, so their prices can be impacted by changes in the demand for cars, which usually reduces significantly during recessionary times.
It’s important to note that while precious metals can be good investments during a recession, they do come with their own risks. The prices of these metals can be volatile, and their values can fluctuate based on factors such as geopolitical events, currency fluctuations, and changes in supply and demand. Additionally, storing physical precious metals can come with its own costs and risks.
There are several ways to invest in gold and precious metals including physical coins and bars, mining stocks, mutual funds and ETFs, and futures contracts. Each method of investing comes with it’s own benefits and drawbacks.
One of the simplest and most cost effective ways to invest is via BullionVault. This is a secure online trading platform for buying and selling physical bullion at low prices. Your bullion is automatically insured and stored in secure international vaults, saving on the cost and complexity of taking delivery of physical bullion.
Overall, gold and other precious metals can be a good way to diversify a portfolio and provide a hedge against inflation during a recession. However, it’s important to carefully consider the potential risks and benefits of any investment and to consult with a financial advisor before making any investment decisions.
Dividend-Paying & Recession Proof Stocks
Dividend-paying stocks are another excellent investment during a recession. Whilst stock markets generally decline significantly in price during a recession, some relatively recession proof industries that offer stability and security, providing investors with a stream of income during tough economic times. Blue-chip stocks, such as Coca-Cola, Johnson & Johnson, and Procter & Gamble, are often considered recession proof because they have a long history of paying dividends and have a strong financial position.
Recession Proof Industries:
- Health care stocks: Health care stocks include companies that provide medical services, develop pharmaceuticals, and manufacture medical devices. During a recession, people still need medical care, making this sector one of the most stable and recession proof industries. Pros include a steady source of demand and potential for growth as the population ages. Cons may include regulatory risks and high valuations due to the perceived stability of the industry.
- Consumer staples: Consumer staples are everyday products like food, toiletries, and household supplies. These products are in constant demand regardless of economic conditions, making these recession proof businesses. Pros include consistent demand. Cons may include lower margins and limited growth potential.
- Utilities: Utility companies provide essential services like electricity and water, making them a relatively safe investment during a recession. Pros include steady cash flow and high dividend yields. Cons may include regulatory risks and limited growth potential due to the mature nature of the industry.
- Defense stocks: Defense companies provide products and services for national security purposes. During economic downturns, governments tend to continue spending on defense, making this sector relatively stable. Pros include a steady stream of government contracts and potential for growth as geopolitical tensions rise. Cons may include political risks and potential for budget cuts.
- Food and beverage companies: These companies provide products that people continue to buy regardless of economic conditions. Pros include consistent demand and potential for growth. Cons may include competition and potential for commodity price fluctuations.
- Discount retailers: Discount retailers tend to do well during a recession as consumers look for ways to save money by switching from expensive brands to budget stores. Pros include strong demand and potential for growth. Cons may include thin margins and potential for online competition.
- Waste management: Waste management companies provide essential services that are needed regardless of economic conditions. Pros include steady cash flow and potential for growth. Cons may include regulatory risks and potential for economic downturns to impact waste volumes.
It’s important to note that while each of these industries is generally considered recession proof, there is no guarantee that they will perform well during every recession. Diversifying your portfolio across multiple industries can help mitigate risk and protect your investments. Additionally, it’s important to conduct thorough research and consult with a financial advisor before making any investment decisions.
Bonds can also be a good investment during a recession, particularly for investors who are looking for a steady stream of fixed income. Bonds are essentially loans that investors make to corporations or governments, and they typically pay interest over a fixed period of time.
High-grade corporate bonds and government bonds are often considered safe investments during a recession because they are typically less risky than other types of bonds. These bonds are generally issued by stable, well-established corporations or governments with strong credit ratings. This means that they are less likely to default on their debt payments, even during a recession. As a result, these bonds may provide investors with a relatively low-risk way to earn a steady stream of income.
However, even high-grade bonds are not entirely risk-free. During a recession, some companies or governments may face financial difficulties that could impact their ability to make their debt payments. In addition, interest rates can also impact the value of bonds, so investors should be aware of potential changes in interest rates during a recession.
On the other hand, high-yield bonds, also known as junk bonds, are typically riskier investments than high-grade bonds. These bonds are issued by companies or governments with lower credit ratings, which means they are more likely to default on their debt payments. However, because of the higher risk, these bonds also offer higher yields, which can be attractive to some investors.
During a recession, high-yield bonds can be particularly risky because companies and governments may face financial difficulties that could impact their ability to make their debt payments. As a result, high-yield bonds may be more likely to default during a recession than high-grade bonds. Investors should carefully consider the risks and potential rewards of investing in high-yield bonds before making any investment decisions.
Overall, bonds can be a good way to earn a steady stream of fixed income during a recession, but it’s important to carefully consider the risks and benefits of different types of bonds before making any investment decisions. Investors should consult with a financial advisor to determine the best investment strategy for their individual needs and risk tolerance.
Is Any Investment Truly Recession Proof?
While some industries and investment options may be considered relatively recession proof, there is no guarantee that any investment is completely immune to the effects of a recession. Even the most stable industries can experience significant declines during a recession. It’s important to keep in mind that recessions are often unpredictable and can have ripple effects across various sectors of the economy.
Another important consideration when it comes to recession proof investments is the potential risks involved. For example, some industries may be heavily regulated, which can lead to increased regulatory risks for investors. Other industries may be highly competitive or subject to commodity price fluctuations, which can impact profitability. Additionally, some recession proof investments may come with lower yields or growth potential compared to other options.
It’s important to conduct thorough research and consult with a financial advisor before making any investment decisions. Diversifying your portfolio across multiple industries and investment types can also help mitigate risk and protect your investments. Finally, it’s important to have a long-term investment strategy and to avoid making impulsive decisions based on short-term market fluctuations.
The Importance Of Diversification
A well-diversified portfolio can be an effective way to weather the storm of a recession and limit the negative impact on your investments. Diversification involves investing in a variety of different asset classes, such as stocks, bonds, real estate, and commodities, and spreading your investments across different industries, sectors, and geographic regions.
By diversifying your portfolio, you can reduce your exposure to any single asset class or investment, and help to mitigate the risks associated with market volatility and economic downturns. For example, if one sector or asset class is negatively impacted by a recession, other areas of your portfolio may be able to offset these losses.
In addition, a well-diversified portfolio can also provide a steady stream of income, even during a recession. For example, bonds and dividend-paying stocks can provide a reliable source of fixed income, even when stock prices are falling.
However, it’s important to note that diversification does not guarantee investment success or protect against all risks. Even a well-diversified portfolio can experience losses during a recession or market downturn. Therefore, it’s important to regularly review and adjust your portfolio as needed, and to work with a financial advisor to develop a strategy that aligns with your investment goals and risk tolerance.
Recession Proof Investment FAQs
How long do recessions typically last and how can this impact my investments?
The length of a recession can vary, but they generally last between 6-18 months. Although the shortest US recession on record lasted only 2 months from February to April 2020 as identified by the National Bureau of Economic Research. This can impact your investments depending on the specific market conditions and how well your portfolio is diversified.
Should I sell my stocks during a recession?
It’s generally not recommended to make sudden and drastic changes to your investment portfolio based on short-term market fluctuations. Instead, it’s important to have a long-term investment strategy and consider the potential impacts on your portfolio before making any decisions.
How can I determine my risk tolerance for investments during a recession?
It’s important to consider your financial goals, timeline, and personal circumstances when determining your risk tolerance. Working with a financial advisor or using online risk assessment tools can also be helpful in determining an appropriate investment strategy.
Can I still make money during a recession?
Yes, it is possible to make money during a recession by investing in the right stocks, bonds, and other investments. However, it’s important to remember that there are always risks involved in investing and no guarantees of profit.
Conclusion: Investing In Recession Proof Assets
In conclusion, there are several recession proof investments that investors may consider during a recession. These investments include defensive stocks, residential property, gold and other precious metals, and certain types of bonds. Each investment has its own unique advantages and disadvantages, and investors should carefully consider their individual risk tolerance, investment goals, and financial situation before deciding what to invest in during a recession.
While it’s true that no investment is entirely recession proof, the investments discussed in this article have historically performed well during recessions and economic downturns. However, it’s important to note that past performance is not a guarantee of future results, and investors should always conduct their own research and consult with a financial advisor before making any investment decisions.
In addition, investors should also be aware of the risks associated with any investment, including the potential for loss of principal, market volatility, and changes in economic conditions. It’s important to have a diversified investment portfolio that includes a mix of different types of investments in order to minimize risk and maximize potential returns.
In summary, while there is no surefire way to guarantee investment success during a recession, investors who carefully consider their options and make informed decisions can increase their chances of weathering economic downturns and coming out on top in the long run.