Here are 3 solid investments to consider during a recession (and 3 to avoid)

Signs of a recession

A recession is a sustained period of decline in economic activity. The most common measurement of a recession is declining gross domestic product (GDP), but factors such as high unemployment, slowed consumer spending, and an inverted yield curve can also be signs that the economy is about to take a nose dive. 

Recessions are a natural part of our cyclical economy. So although we can’t predict exactly when one will occur, it’s safe to say that there will be one eventually. And the best way to get ready for a recession is to build a portfolio that can weather a recession before the market turns. 

“Proactive planning allows you to focus on the things that you can control—how much you save, your level of risk, the accounts you use, and fees and taxes—and ignore what you cannot (the markets, economy, inflation, and interest rates),” says Brent Weiss, a certified financial planner and head of financial wellness at Facet.

So if you want to prepare your portfolio for a recession—just in case—here’s what you should know.

Best investments during a recession 

When the economy and stock market are down, you can often buy into securities at a cheaper price than if you invested while the market was at its peak. That gives you the opportunity to realize higher gains as the economy recovers. 

And the best investments during a recession are not so different from the best investments to make at any point of the business cycle. Still, there are certain investments that can help your portfolio weather a recession and minimize losses.

1. Dividend stocks

Investing in dividend stocks is one of the most effective ways to take advantage of long-term growth among top companies. These stocks share profits with investors on a regular basis (often quarterly) in the form of dividends, which can be cashed out or reinvested. Only the most stable and profitable companies tend to pay out dividends, meaning these stocks are generally less volatile overall. 

However, if you don’t want to purchase individual stocks, another option is to invest in a dividend fund, which allows you to invest in a basket of the top-performing dividend stocks.

2. ETFs

Investment funds are a strategic option during a recession because they have built-in diversification, minimizing volatility compared to individual stocks. However, the fees can get expensive for certain types of actively managed funds.

Exchange-traded funds (ETFs), on the other hand, generally have lower fees compared to mutual funds because they’re passively managed—they’re set up to track a specific index, such as the S&P 500. And value stock ETFs are particularly well-suited to fare in a volatile or down market because the companies that make up the funds tend to have solid fundamentals and produce essential goods. 

3. Real estate

Equities aren’t your only option for investing when the market is down. Real estate can be attractive to investors because when the economy is slow, it’s possible to buy property at lower prices and lock in lower mortgage rates. Again, that translates to greater returns as the market recovers, especially because real estate generally appreciates over time.

Investing in rental properties is also a good way to diversify income streams, which can be especially important during a recession when job stability tends to weaken.  

Investments to avoid during a recession 

Having a well-rounded and diversified portfolio is the key to weathering economic ups and downs. However, there are some investments that generally perform poorly during times of market uncertainty or turbulence. 

1. Speculative investments 

There are certain times when putting money in riskier investments is the right move. But a recession is generally not one of them.

It’s important to follow your long-term investment plan and avoid getting distracted by promises of big returns or caught up with what other people are doing. “Your situation is unique, and your investment strategy needs to reflect that,” says Weiss. “What the 28-year-old billionaire is doing with his or her money shouldn’t be your North Star.” 

2. High-yield bonds

Bonds are generally considered safe, stable investments. That said, not all bonds are created equal. High-yield bonds are issued by companies with lower credit ratings, indicating a higher probability of default. During a recession, these businesses often face greater financial difficulties, declining revenues, and increased default risks. So as economic conditions worsen, the likelihood of companies failing to meet their debt obligations and defaulting on their bond payments increases.  

3. Highly leveraged companies

In general, it’s important to invest in companies with sound financial health. That’s even more true during a recession. Businesses that carry a lot of debt tend to see their share prices fall when the economy is down, as investors see them as more vulnerable to changing interest rates and declines in profit. 

The takeaway 

Investing during a recession can be stressful, especially if your portfolio loses value. However, it’s important to stay the course. “How you behave matters far more than how the market behaves,” says Weiss.

In other words, mindset is just as important as expertise when investing during a recession. It’s crucial to remember that selling when the market is down means selling at a loss. If you panic, you may make a poor investment decision to get out of the market right before stocks begin to climb again. Remember that ups and downs are part of the investing process. 

“Proactive planning is the most important thing you can do to help you keep your financial calm amidst the chaos of bear markets and economic recessions,” says Weiss. “Focusing on the things you can control, and ignoring the things you cannot, will help you navigate any market or economic environment with clarity and confidence, and that can make all the difference.”