How to Invest During a Recession

Written by Lindsay Mayhall on July 17, 2022

With stocks falling into a bear market this year amid fears that aggressive rate hikes from the Federal Reserve will plunge the economy into a looming recession, top firms on Wall Street are advising investors to stick with stocks that have historically performed well during past downturns, such as consumer and healthcare companies.

Think long term.

 Investing in the stock market during a recession can be difficult, but it's not impossible. The key is to have a plan and stick with it.

If you're just starting out with investing, here are some tips to keep in mind:

Think long term. Don't get discouraged by short-term fluctuations or volatility. You're not going to make money overnight; if you do, that's a good sign that you're playing with fire.

Don't get emotional about your investments; they go up and down all the time. Focus on long-term growth and profit, not short-term gains or losses.

Don't sell when the market is down — wait until it starts heading back up again before making any decisions about your portfolio.

It's important to diversify your portfolio by investing in different assets like stocks, bonds and real estate so you don't put all of your eggs into one basket (or stock). If one company tanks, chances are you'll still have others performing well enough to make up for its loss so your overall investment doesn't suffer too much damage from one bad pick.

Consider bonds.

Bonds are considered fixed income investments, and they're safer than stocks. In the event of a recession, bond prices tend to rise. That's because investors who have cash on hand will buy bonds when they see other investments falling in value.

Buy U.S.-based stocks. Stocks from companies based in the U.S. tend to weather recessions better than other types of investments do. That's because there's less risk that a foreign government will collapse or default on debt owed to Americans — as happened during the 2008 financial crisis when Lehman Brothers collapsed and AIG was bailed out by the government.

Diversify your portfolio across different sectors and industries so that if one sector suffers because of economic conditions, others may not be affected as much — or at all.

Look at consumer staples.

 The best investments during a recession are consumer staples. These are companies that sell products that people need, not just want. For example, food, energy and water.

Look at consumer staples. Look at the companies that make these products and make sure they're stable in their businesses. Don't invest in any company unless you can see it being there for the next ten years or more.

You can also look at companies that produce things that are needed by everyone, like clothing or food. You don't have to buy stocks just because they're cheap; you can also buy them because they're good companies with good management teams who know how to run their businesses well.

Review real estate investment trusts.

 Real estate investment trusts (REITs) are companies that own and manage commercial real estate. They provide investors with the opportunity to invest in real estate without having to go through the hassle of buying property directly.

There are two ways to invest in REITs: through mutual funds or exchange-traded funds (ETFs). Mutual funds buy shares of individual companies and then hold them for as long as possible. ETFs track an index, such as the S&P 500 index, by purchasing shares in each company listed on that index.

When you invest in a mutual fund or ETF, you're buying shares of the fund itself — not the underlying assets owned by the fund. This means that if your fund owns a piece of property that suddenly becomes worthless, the value of your investment will also drop sharply. But if you buy shares in a company that owns property worth $100 million but then loses half its value due to a downturn in real estate prices, you'll still have $50 million worth of assets on which you can collect rent payments every month which is still beneficial in the long run.

Check out consumer discretionary stocks.

Consumer discretionary stocks are a good place to start. They're sensitive to changes in consumer behavior and tend to perform well during recessions.

These stocks include:

Retailers and restaurants — These companies' sales often fall during recessions because people spend less on discretionary items like clothes and restaurant meals. But their profits remain strong because they cut costs during a downturn by laying off workers, lowering prices or selling off inventory below cost. This makes them attractive investments during recessions because they can quickly reverse losses once the economy recovers.

Auto manufacturers — Car sales tend to drop during recessions as consumers cut back on spending, but auto manufacturers can still make money by lowering prices and offering incentives like cash rebates and 0% financing deals that boost sales volume without hurting profits much.

Travel agencies — Travel agencies don't usually experience big drops in revenue during recessions since people generally still have vacation plans even if they're spending less on other things right now.

If you have cash to spare, consider buying a home.

 The best way to invest during a recession is to buy a home.

There are plenty of other investments you could make, but the housing market has historically been one of the few that weathers recessions well. While other asset classes might take a hit or two along the way, homes generally hold their value well through downturns. And if you’re lucky enough to buy at the right time and place, you can make a lot of money on your investment over time.

Here’s how:

If you have cash to spare, consider buying a home. This is especially true if you’re thinking about buying in an area that has not yet recovered from its last recession — or hasn’t really felt the effects of this current one yet. After all, it takes time for prices to adjust after they drop, so some markets may still be undervalued compared with where they were before 2008-2009.

If you don’t have any savings and can only afford to buy a cheaper home than you otherwise would like — or if you need help getting into a better neighborhood — look into low down payment loans or mortgages insured by the Federal Housing Administration (FHA). They always have options available for all types of borrowers.

Takeaway: Here are a few things you can do to minimize the risk of investing during a recession.

The best way to invest during a recession is to find ways to minimize your risk. If stocks are down and there is an overall economic downturn, it's safest to stick with dividend-paying or income stocks that have been tested over the previous decades. Furthermore, it might be advisable to consider long-term investments as opposed to short-term investments as well. Short-term investments usually carry a history of risk in a recession, but long-term investing has proven itself to be effective even in times of decline.