What to Invest in During a Recession: 4 Ideas

Uncover effective strategies for investing during a recession, assessing personal goals and current market situations. Examine four robust investment approaches to manage through economic declines effectively.

By Brad Nakase, Attorney

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Recessions aren’t all bad. They give investors a golden opportunity to buy stocks at discounted prices. Smart investors make money in recessions. Here is what to invest in during a recession.

What Happens During a Recession

A recession is a period of significant economic decline that lasts for 6 months or more. The economic decline affects multiple industries, so the stock market takes a hit across the board. As a business’s production is affected by the recession, its stock price goes down. They may also halt dividend payments during recessions in order to preserve cash flow. After the recession, once the business recovers, the stock price will go up, and the business will continue to pay dividends. Investors who invested in the business stocks during the recession will make more money.

How to Know What to Invest in During a Recession

Before we give you some ideas of what to invest in during a recession, we’ll share the theory behind how to pick investment opportunities during a recession. This will allow you to know what to invest in during a recession, no matter the circumstances.

1. Understand Your Investment Goals

Before you start investing during a recession, you should review your investment goals and devise a strategy. It may be tempting to start buying stock as the prices drop, but you need to make sure that your recession investments further your goals.

Think about:

  • What is important to you when choosing stocks (your values, growth industries, businesses you know and like, etc.)?
  • Why are you investing (for retirement, to make passive income, for short-term growth, etc.)?
  • Your risk tolerance

There are a lot of different investment options out there, so this will help you to choose the right ones for your goals.

2. Check Your Emergency Fund

All investors should have an emergency fund, especially if they intend to invest during a recession. An emergency fund is a savings account with enough money to cover 3-6 months of expenses. This money should be liquid and easy to access during an emergency.

Investors who want to invest during a recession will benefit from an emergency fund because it allows you to hold your stocks. You won’t have to sell early in order to cover your living expenses if you were to lose your income sources during a recession.

3. Look at Which Industries are Affected by the Recession

Each recession is different, with different impacts and different industries affected. When considering what to invest in during a recession, look at which industries are most affected by the recession. These are the stocks that will decrease in price the most.

4. Research the Company to Verify its Stability

During a recession, there may be companies that go bankrupt. Investing during a recession is a great way to make money, but you don’t want to invest in a company that goes bankrupt during the recession.

When deciding what to invest in during a recession, consider how you will determine the company’s stability. What kind of things will you research, and what indicators will you look for?

4 Ideas for What to Invest in During a Recession

There is no formula for what to invest in during a recession. Each recession is different, so investors should tailor their investment strategy to each recession.

That being said, there are some types of stocks that have historically been good recession investments. Here are some ideas for what to invest in during a recession.

1. Fixed Income Investments

Stocks that pay dividends or bonds are popular investment choices because they provide a steady income as well as capital growth. During a recession, companies may temporarily halt dividend payments, but a recession offers a great opportunity to pick up these income-generating investments for a bargain.

Some examples of fixed-income investments include:

  • Dividend ETFs
  • Bonds
  • Dividend stocks
  • Mutual funds

The dividends can either be used as an income source or reinvested to compound your investment results.

2. Index Funds

An index fund is a fund that tracks a portfolio of stocks, which is less risky than investing in individual stocks. The index fund will be made up of a range of different stocks, so the risk is spread out if one or a few of the stocks perform poorly. There are index funds that represent a healthy spread of industries (like the S&P500), and there are index funds that represent a particular industry (like the NASDAQ).

People who are risk-averse or don’t have the time to become stock market experts wondering what to invest in during a recession will often choose index funds. They are seen as a safer option, and they often pay dividends too.

3. Large Cap Stocks

A large-cap stock is a stock with a $10billion+ market capitalization value. The size of these companies means that they are likely (not guaranteed) to be more stable. People often feel safer investing in these large-cap stocks, especially during a recession, because they have more resources at their disposal.

Stock screeners can help you to identify large-cap stocks, both in general and by sector.

4. Healthcare and Consumer Staples

There are some industries that will be in demand no matter what happens. Examples of these are healthcare, real estate, utilities, and energy. They may be affected by the recession just like every other sector, but they are necessary to everyday life, and therefore, they tend to be more stable and likely to grow following the recession.

Consider the essentials in your budget, like housing, utilities, food, and health insurance, and research those sectors to find what to invest in during a recession. You will still need to do some research to look into which companies in those industries would offer good investment opportunities.

In Conclusion: What to Invest in During a Recession

A recession offers an opportunity to pick up stocks at bargain prices, but investors should still stick to their overall investment goals and research opportunities. Think carefully about what to invest in during a recession, and you will come out the other side stronger than ever.

Have a quick question? We answered nearly 2000 FAQs.

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