Are you worried about a recession wreaking havoc on your portfolio?
No company or sector is completely immune to recessions, yet some do far better than others during periods of upheaval.
If the specter of an upcoming recession spooks you, then forget about high-volatility equities such as penny stocks. Even solid blue chip stocks often take a nosedive during recessions.
Instead, start looking into recession-proof — or at least recession-resistant — investments that can reduce risk in your portfolio and emerge from the storm even stronger.
You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
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Not all companies and sectors take a hit during recessions. In fact, some thrive as investors panic and look for safer places for their money.
But there’s no secret investment that always wins even during bear markets. Half the battle is simply staying calm and avoiding panic selling or trying to time the market. After every recession in history, stock markets have recovered. Remember that as you form your investing strategy, and plan for the long term.
1. Recession-Proof Industry Stocks
Some industries perform better than others when the economy shrinks. Historically, these defensive stocks remain more stable when economic headwinds start blowing.
Health Care Stocks
Regardless of whether the economy shrinks or grows, people still get sick and injured. Diabetes doesn’t go away at a specific GDP contraction rate.
Granted, if you lose your job, you’ll postpone that elective surgery you’ve been considering. But by and large, the medical industry continues chugging along in good, bad, or indifferent economies.
Look at Johnson & Johnson during the Great Recession. From the beginning of 2008 through the end of 2010, their share price dipped by around 7%. Over that three-year period, the company continued paying out dividends, averaging about 3% yield annually. Even with the dip in price, an investor would still have come out ahead given the dividend yield.
Under the umbrella of the health care industry fall hospitals, day surgery centers, nursing homes, pharmaceutical companies, medical device companies, and companies that produce health care products such as bandages. You can pick individual stocks, or you can diversify by investing in an index fund through a broker like Ally Invest.
Example Fund: The Fidelity MSCI Health Care Index ETF (FHLC) offers broad exposure to health care stocks.
The same logic applies to utilities. People still need electricity, even when the economy shrinks.
In fact, there’s even less wiggle room with utilities than there is with health care. Sure, when money is tight, you look for ways to lower your heating bill. But while patients have the option not to pay their medical bills, you lose your electricity and gas if you don’t pay your utility bill. That’s why utilities are among the last bills people default on when they’re low on cash.
Another benefit of utility stocks is their high dividends, as one glance at Sure Dividend’s list of high dividend stocks makes clear. These tend to be steady income-producing stocks, rather than erratic growth-oriented stocks. They’re steady to the point of being downright boring.
Example Fund: The Vanguard Utilities Index Fund ETF (VPU) is a cheap and broad way to buy utility stocks.
Consumer Staples Stocks
It comes as no surprise that people keep buying toilet paper and toothpaste during recessions.
In fact, the name says it all: consumer staples. These are goods that we all use and need in our day-to-day lives, regardless of the country’s GDP.
Other examples of consumer staple products include soap, shampoo, dish detergent, laundry detergent, and paper towels. You don’t have to think too hard about the companies that sell these products — you know the names Colgate-Palmolive, Procter & Gamble, and Unliver because you see them everyday on the products you use at home.
Example Fund: If you don’t feel like buying shares in individual companies, try the Vanguard Consumer Staples ETF (VDC).
Discount Retailer Stocks
People may stop buying clothes at Armani during recessions, but they don’t stop buying clothes at all. In fact, they suddenly start flocking to discount retailers for more of their needs. During the Great Recession, Walmart’s sales went up, not down; they rose by 11% from late 2007 to late 2010. Investors noticed too, and their stock returned 21% including dividends.
The same goes for restaurants. Middle-Class Mike might stop eating at steakhouses when the economy tightens, but he won’t shun McDonald’s.
Think about it from a habit perspective: It’s easier to change where you shop or eat than it is to stop shopping or eating out entirely. To go from eating half your dinners out to cooking every single night takes an enormous shift in behavior. But eating at Red Lobster instead of an upscale seafood restaurant? That’s an easy shift.
Look low-end for recessionary winners.
Example Funds: Why complicate it? Just buy Walmart stock (WMT). Side effects may include feelings of guilt for supporting the world’s largest retail conglomerate, in which case, you may want to consider Costco (COST) or Kroger (KR) instead.
Tobacco & Cheap Alcohol Stocks
If you don’t smoke, you probably expect discretionary expenses like tobacco to plummet during recessions. If people can barely afford their rent and utilities, how can they possibly go out and spend money on cigarettes and booze?
But what consumers are actually buying with these goods is comfort. During times of stress, people tend to smoke and drink more, not less. Consider the tobacco company Altria. From late 2007 to late 2010, their stock returned a monstrous 28%, even as most stocks tumbled in freefall.
Beware not to generalize this effect to all so-called “sin stocks” though. Casinos and other gambling-related stocks perform terribly during recessions. And like retailers and restaurants, people flee from high-end alcohol to the lower end of the spectrum. It wasn’t a coincidence that Pabst Blue Ribbon suddenly became cool again among hipsters during the Great Recession.
Example Funds: Rather than broad exposure through a fund, consider picking individual tobacco or low-end alcohol stocks, such as Altria (MO), Philip Morris (PM), or Molson Coors Brewing Company (TAP).
2. Dividend Stocks
For some stocks and funds, the primary returns lie in their income yield, not their growth. Utilities and real estate investment trusts (REITs) — including mortgage REITs — offer common examples.
These stocks and funds tend to be less volatile and suffer minimal losses during recessions as they generate ongoing income for investors. And because they provide an income stream alternative to bonds, they tend to do well when bond yields dip — such as when central banks lower interest rates to stimulate the economy during recessions.
Companies that pay a high dividend can typically do so because they have strong cash flow and healthy balance sheets — a winning combination in recessions. But be careful about chasing companies solely based on dividend yield.
Sometimes companies try to lure investors with high dividends to distract from their poor fundamental health. Before investing for dividends, learn how to analyze stocks with high dividends based on their dividend payout ratio. When in doubt, aim for diversification with dividend ETFs rather than picking and choosing individual stocks.
Example Fund: The Vanguard High Dividend Yield Index Fund Investor Shares (VHDYX) offers a diversified portfolio of dividend stocks. You can also look for individual high-yield dividend stocks.
3. Precious Metals
When the economy bombs, everyone dives for the cover of precious metals such as gold and silver. They’re the ultimate defensive investment, the literal definition of the expression “the gold standard.”
You could go out and buy gold bullion bars of course. Or you can avoid the strained back and hassles of storing it securely by buying funds that own either a single precious metal (like gold) or a diverse portfolio of them. Alternatively, you can opt for mining company stocks, or funds that own many of them.
Do your homework before investing in gold or any other precious metal however. No one thinks about precious metals much when the economy hums along healthily, and they often underperform other types of investments in the long term. But when investors panic, they flock to precious metals as a safe haven.
Example Fund: For a mix of metals, try the Invesco DB Precious Metals Fund (DBP). For gold alone, check out the GraniteShares Gold Shares fund (BAR).
Precious metals aren’t the only commodities available to buy. You can also invest in food, oil, and countless other commodities, many of which are staples of modern life. Do Americans eat less corn during a recession? Of course not.
Investing in commodities such as corn or wheat may not be sexy, but no defensive investment is particularly exciting. Pundits may gush over high-growth tech startups when the economy is booming, but those shooting-star investments are often the first to fall during a recession.
Just remember that not all commodities inherently do well during economic downturns, unlike precious metals. Learn about investing in commodities if you’re new to it, and as always, remember to diversify.
Example Fund: Try the Invesco DB Commodity Index Tracking Fund (DBC) for exposure to many types of commodities.
5. Real Estate
All right, I take back what I said about recession-proof investments never being sexy. There’s an exception to every rule, after all.
Nowadays you have more options than ever to invest in real estate. Beyond publicly-traded REITs, consider the following options for real estate.
Rental properties offer ongoing passive income, predictable returns, tax benefits, protection against inflation, and long-term appreciation potential. They also offer protection against recessions. People still need a place to live, even during downturns. Although home values can drop, rents rarely dip.
Consider the housing crisis during the Great Recession. Nationwide, the Case Shiller Home Price Index dropped by 27.42%, according to the Federal Reserve. Yet median rents did not drop, according to the U.S. Census Bureau; instead, they simply flatlined for several years.
Why? Because during recessions and housing contractions, homeowners often become renters. Even as incomes stagnate, demand rises for rental housing.
You can forecast rental cash flow and returns because you know the market rent and your expenses. You also know that, unlike home values or stock prices, the rent won’t fall by 27% in a bad quarter. Even in the worst recession and housing downturn in living memory, rents didn’t fall.
Still, being a landlord isn’t for everyone. Be sure to understand these considerations before renting out your first property, and beware of increasing anti-landlord regulation as exemplified by the eviction moratoriums seen in the coronavirus pandemic.
Example: To explore rental property returns nationwide, check out Roofstock. They include a wealth of market and return data for each property and offer two outstanding guarantees.
Each real estate crowdfunding platform works differently. Some own properties directly — known as equity crowdfunding — while others own debt secured by real estate. A few, such as Fundrise, offer a mix of both.
You can buy into pooled funds that own several properties, such as Streitwise and Roofstock One offer. Or you can buy fractional ownership shares in a single property, as offered by Arrived Homes.
These all represent long-term investments, typically with a five year minimum commitment. In some ways, that actually protects you against the impulse to panic sell during a downturn. And in the meantime, you can collect passive income from most of these platforms to help stabilize your finances.
Secured Debt Crowdfunding
Other real estate crowdfunding platforms own loans secured against real property. If the borrower defaults, they foreclose to recover your money.
Some platforms let you buy shares in a pooled fund that owns many loans. For example, Concreit pays a fixed 5.5% dividend yield, and you can withdraw your funds at any time without penalty on your principal.
Other platforms let you pick and choose individual loans to fund. I particularly like Groundfloor, which lets you invest as little as $10 in any loan. They grade each loan by risk, with the higher-risk loans paying higher interest rates. Rates range from 6.5% to 14.5%.
6. Treasury Bonds
No list of recession-proof investments would be complete without U.S. Treasury bonds. Uncle Sam always pays up; he just doesn’t pay well.
Keep in mind that in a recession, the Federal Reserve tends to lower interest rates. As interest rates drop, so do bond yields, which means bond prices go up. That serves you just fine as a holder of higher-yield bonds bought pre-recession.
If none of that made any sense to you, read our overview of bond investing for a quick introduction.
Finally, remember that you have several options for investing in Treasury bonds. One option is Treasury Inflation-Protected Securities (TIPS), and another is bond mutual funds.
Example Funds: You can buy a fund such as the Fidelity Long-Term Treasury Bond Index Fund (FNBGX), or go straight to the source and buy bonds from the U.S. Treasury Department.
7. Low-Volatility Funds
At the risk of stating the obvious, volatility is a measure of risk, and low-volatility funds are specifically designed to fluctuate less with the mood of the market. They also tend to have lower returns, but hey, that’s what you get when you aim for low risk.
Often, these funds operate by screening for the least volatile funds in a specific index or market. In many cases, that means they include lots of the stock types already outlined above, such as utility and health care stocks.
Some low-volatility funds take it a step further and also identify stocks with minimum correlation with one another. That leads to a more diverse fund with greater exposure to different sectors.
When you want to get defensive, go low-volatility.
Example Funds: The iShares Edge MSCI Minimum Volatility USA ETF (USMV) includes U.S. stocks only, while the Vanguard Global Minimum Volatility Fund (VMVFX) features both U.S. and international stocks with low volatility.
8. Hedge Funds
Want higher risk but potentially higher returns?
Hedge funds aim to make money in all markets, not just freewheeling bull markets. They combine a range of advanced strategies such as shorting certain stocks, arbitrage, hedging, futures and options contracts, and more to try to zig even when the market zags.
Sometimes they succeed. Sometimes.
Before committing money to them, make sure you understand how hedge funds work — and the risks that come with them. Beware too that because they’re so actively managed, hedge funds charge high expense ratios.
Example Funds: Read up on the largest hedge funds in the world for more information.
Stock prices can sink faster than the Titanic during a recession. Prices for top-tier works of art? Not so much.
Art shares a low correlation with stock markets, according to Citi. In other words, when stocks dip, your art investments may not. After all, the value of a Picasso isn’t going to dip by 50% overnight.
Alternative asset classes like art can add a useful hedge against market volatility. The CEO of Blackrock, the largest asset manager in the world, believes it’s an even better store of value than gold. When stocks plummeted in 2008, money flowing into masterpiece art nearly quadrupled.
When stocks went down again in 2018, blue-chip artwork posted an average gain of 10.6%. Compare that to the S&P 500 falling by 5.1% that year.
Example: If you want to add art to your portfolio, check out Masterworks. They let you buy shares of high-end paintings as an SEC-qualified investment.
Some investors simply can’t stomach watching their investment portfolios dive by 25%. Even when they have decades to go before their retirement, the thought of their portfolios losing money keeps them up at night.
No amount of data about stock market corrections can change your temperament. For that matter, no amount of higher returns can pay for your lost hours of sleep.
Beyond those who can’t handle a downturn emotionally, other investors can’t handle downturns financially. A new retiree may need to return to work if their portfolio drops by 25%.
All investors must assess their own risk tolerance. It varies based on your personal finance goals, age, finances, and investing temperament. If you can’t stomach heavy short-term losses, consider moving money from more volatile investments like growth stocks, tech stocks, and small-cap stocks into some of the ideas outlined above.
You could leave your money in cash, of course, but then you don’t risk a loss — you guarantee a loss to inflation. Often the fear of losing money is exactly what causes you to lose the most money.