SUMMARY: No one knows when the next recession will occur, but there are reliable, nearly recession-proof investment strategies out there. Here are just a handful that can help you be prepared.
When markets are bullish and returns are high, you likely won’t give much thought to how your portfolio will behave during a recession. But just as the sun rises and sets, the economy will eventually cool and you will need to face another recession, whether it’s next year or in 10 years.
Companies and their customers will lose confidence in each other, unemployment will rise and incomes will fall—setbacks that, while temporary, will make you understandably skittish about staying the course with your investments.
But there are reliable, nearly recession-proof investment options out there. Here are just a handful:
Bumping up your cash holdings a bit provides one real benefit—flexibility. People get worried during a recession, which can quickly drive down the price of favored stocks. A little extra cash at the ready allows you to snatch these up at bargain rates.
But don’t lean too heavily into cash. Recession-era cash investing is like dark chocolate—a little more can be good for your health, but a lot more can rot your teeth.
Consumer staples and healthcare
These are two historically reliable areas of the equity market, because people still need food, toiletries, electricity, medical necessities, and general household items. Even when incomes are down and consumers spend less, these expenses are the last things to be cut.
On the other hand, consumer discretionary sectors of the economy, such as electronics, personal travel, clothes, restaurants and luxury goods, tend to suffer.
U.S. Treasury bonds
High-quality bonds like those offered by the U.S. Treasury tend to be the strongest recession performers, because they provide higher returns than cash and are generally considered a safe haven. Consider longer-dated bonds (five to six years), which have a better chance of riding out a downturn.
Reliable dividend stocks
The passive income provided by dividend stocks can be a useful safety cushion during a recession. Companies with balance sheets firmly in the black, ample cash flow, and a minimum of debt are ideal candidates for dividends. They will have a much easier time riding the waves of a turbulent economy.
A good place to start shopping is dividend aristocrats—large companies in legacy industries that have increased payouts to shareholders for at least 25 consecutive years. They are a rare breed and generally considered to be recession-proof—in 2019, there were just 57 on the Standard & Poor's 500—and they hail from industries such as retail, energy, and healthcare.
Housing prices often drop in a recession, which can spell trouble for homeowners but present an opportunity for investors. Not only might you be able to pick up some property at a steep discount, but a dependable tenant also provides reliable income that can lessen a recession’s impact.
Although each of the previously mentioned options may provide a great recession-era opportunity, remember the golden rule of investing—diversify, diversify, diversify. This is an especially critical concept during a downturn, because specific companies or sectors within your portfolio may take a dip, leaving the others to pick up the slack. Make sure it’s stocked with a healthy assortment of asset classes that can stand firm when the markets turn up the heat.
The smartest investment? You
A recession is a great time to turn your gaze inward and ask what you really want to do and what kind of money you need to get there. You are your own best investment opportunity and if that means learning a new trade or enrolling in an extension program to gain more skills in your current field, then embrace this new direction.
Even If you’re satisfied with your career, turbulent waters on the horizon can be a sign that it’s time to pay down debt and reduce your financial obligations. In the event of a downturn, you’ll have fewer monthly bills weighing on your bank account.
Although no one has a crystal ball to predict the day and time of the next recession, there are concrete steps you can take now to prepare for it. Our e-book, Your Guide to Popular Retirement Plans, is a great place to start.