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What to invest in during a recession?

By Shlok Kamat

22nd Aug 2022

2 mins read

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A recession is a period of declining GDP. It is generally defined as a sustained decline for two or more consecutive quarters. Recessions aren't just about poor economic growth. They are accompanied by other characteristics like widespread job losses, fewer available jobs, and more government relief (think stimulus payments and increased unemployment benefits).

With all that in mind, you may wonder if investing is still a good idea during a recession. Or would it be just better to keep your hard-earned money in the bank?

Background

When the market is soaring, it's easy to forget that what goes up comes down too. But economic slowdowns are cyclical. It means there might another recession will be 10 -15 years later.

So, there's no such thing as a "recession-proof" investment. Still, some types of stocks and investment strategies could help your portfolio perform better during an economic downturn than the rest.

It would be best if you considered your personal goals to choose the correct instrument to invest in. Are you looking to:

  • Minimize the risk that investment will fall in price during market volatility
  • Maximize long-term returns
  • Create a source of fixed income.
  • Invest in the stock market while prices are low (also known as buying the dip)

Building a portfolio that incorporates all these strategies may be ideal, but successfully tackling any of them could significantly impact your financial future. The following tips will help you put together a proper plan for you.

  1. Seek Out Core Sector Stocks

During a recession, you might be inclined to give up on stocks, but experts say it's best not to let go of your equities altogether. When the rest of the economy is on shaky ground, a handful of sectors often continue to forge ahead and provide investors with steady returns.

So if you want to protect yourself during a recession, consider investing in the healthcare, utilities, and consumer goods sectors. People will still spend money on medical care, household items, electricity, and food, regardless of the state of the economy. As a result, these stocks do well during busts (and may underperform during booms).

2. Focus on Reliable Dividend Stocks

Investing in dividend stocks can be a great way to generate passive income. However, when comparing dividend stocks, some experts say it's a good idea to look for companies with low debt-to-equity ratios and strong balance sheets.

If you don't know where to start, you may want to look into dividend aristocrats. These companies have increased their dividend payouts for at least 25 consecutive years.

3. Purchase Precious Metal Investments

Precious metals, like gold or silver, tend to perform well during market slowdowns. But since the demand for these commodities often increases during recessions, their prices also go up.

You can invest in precious metals in a few different ways. The most straightforward route is buying coins or bars from a seller or coin dealer. However, a better, more intelligent way to purchase digital gold is by using Spenny. You don't pay storage costs and can convert it into physical gold when needed. While this differs from buying security, it's as good as any other investment option.

FAQs

How should one rebalance one's portfolio?

One must consult a financial advisor to rebalance their portfolio.

Why are dividend shares recommended during recessions?

Dividends are a way of passive income and can be used to offset any reductions in your active income.

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