What to Invest in During a Recession: 7 Do’s & Don’ts

What does one invest in during a recession, given the very bleak macroeconomic outlook predicted by leading analysts and investors such as Jeremy Grantham, Michael Burry and Ray Dalio?

The year 2022 has been a rough one. With the global economy having taken a beating the last two years due to pandemic lockdowns, 2022 brought on record-high inflation in many countries, leading to stagflation.

Against this already gloomy background, geopolitical complications namely the Russia-Ukraine war increased the likelihood of a recession. Tech stocks like Netflix are already down by more than 50%, and the S&P 500 have fallen to a two-year low.

With inflation eating away at our cash savings on one hand, and economic instability endangering the financial markets on the other, it seems like investors are caught between a rock and a hard place.

But there are always opportunities to tap on, if one knows where to look. Here are some suggestions.

What to invest in during a recession

A recession can surface some of the most rewarding investments–this is because when entire markets are in the red, investors can acquire valuable stocks at a discounted price. This is precisely why successful investors see troubled economic times as an opportunity–they buy the dip.

Consider this: There hasn’t been a recession or even a depression that hasn’t passed. Economic shocks are a cyclical phenomenon. In other words, an investor can make money from investments during a recession by strategically investing in companies with growth potential.

Here are some specific tips for investing during a recession:

1. Do consider managed instruments such as mutual funds, index funds, and ETFs. These are portfolios of assets that cover entire sectors, industries, markets, or indices. As such, they are usually a more balanced choice than investing in individual stocks.
2. Do consider parking excess cash in safe, low-risk instruments such as a short-term fixed income fund. This is because in a high-inflation, high interest rate environment such as the second half of 2022, money markets will generate higher yields.
3. Do consider equity investing in recession-proof sectors–these would be the businesses that provide key goods and services, such as essential groceries, healthcare, critical technology, energy and water supply, repairs, and even some “indulgences” such as snacks and confectionery.  These sectors will benefit from the increase in price because of inflation.
4. Do consider discounted blue-chip stocks. If you’re comfortable taking on some risk, then stocks in fundamentally sound companies can be a good investment during a recession. When the stock market drops, it presents an opportunity to buy quality stocks at discounted prices.
5. Do consider investing in gold, which has historically held its value even during times of economic uncertainty.

What not to invest in during a recession

Don’t focus too heavily on cyclical businesses such as tourism, hospitality, and entertainment during a recession. These industries tend to be more vulnerable to economic downturns due to their reliance on consumer spending which can decrease during recessions.

(However, it is interesting to consider the Lipstick Effect observed during the Great Depression of the 1930s. It describes the tendency for consumers to continue to buy small “extras”—such as cosmetics, even during a bad economy. The explanation is that these purchases make people feel better during hard times.)

Additionally, some manufacturing sectors tend to suffer due to declining demand or rising costs.

Don’t go for highly-leveraged companies. These tend to be at greater risk of bankruptcy or insolvency, as they have taken on large amounts of debt and can quickly become overwhelmed by the burden of repayment if their revenue streams dry up due to weakened economic conditions.

In addition, highly leveraged companies often have limited access to credit and may not be able to take on additional debt in order to survive during a recession. Investing in such companies can expose one to significant losses if they are unable to withstand a protracted economic downturn.

Crypto investing during a recession: yes or no?

Conventional wisdom will say that one should stay far, far away from assets like cryptocurrencies, which are volatile even in a normal economy.

In the past year, crypto generally has been moving in the red zone, with some exceptions. Bitcoin, for example, has fallen by as much as 72% since its historical highs from November 2021.

The thing about crypto as an asset class is that it is so young–the best investor in the world cannot know if it is a viable investment option.

As such, the same rules apply to crypto investing, or even any investing, be it during a recession or a normal economy:

• Only invest with excess cash or cash you can afford to lose
• Only invest if you have high conviction about crypto, because that will motivate you to do proper research. This is because even in crypto there are blue-chip/ stable coins such as the top 10 cryptos, and then there are the potentially-go-to-zero altcoins i.e. small-cap projects without clear use cases–DYOR.

Is cash king in a recession?

Keeping cash on hand is important in a recession for the most obvious reason–you may lose your income. Having sufficient cash will enable you to cover your expenses for at least a few months. Cash reserves are useful because they’re completely liquid; you do not depend on time or have restrictions on their withdrawal.

Investing-wise, cash can be a great asset to have during a recession. This is because it provides you with liquidity, which can help you take advantage of any investment opportunities that arise while the economy recovers.

Additionally, cash is not subject to market volatility and therefore won’t lose its value if the markets crash. However, depending on your financial goals, it may not always be the best investment to make during a recession, especially if you are sitting on a lot of extra cash.

If your focus is on long-term growth, then it may be better to invest in other assets with more potential for appreciation over time.

Ultimately, every investor’s situation is different and cash should be considered alongside other investments when deciding what to do during a recession.

Parting shot

There are a number of things that investors can do during a recession to protect their portfolios and make sure that they are positioned for success when the economy recovers.

• Diversify your investments.

This means not putting all of your eggs in one basket. Instead, spread your money across a variety of different asset classes and investments. This will help to protect you if one particular investment loses value.

• Stay disciplined with your investing.

This means sticking to your investment plan and not making any impulsive decisions. During a recession, there may be a temptation to sell off investments that have lost value. However, this can be a mistake since many of these assets will eventually rebound. By holding onto your investments, you’ll be able to take advantage of the eventual recovery.

• Remember that recessions don’t last forever.

While they can be difficult times for investors, they eventually come to an end. When the economy recovers, so will your portfolio. By following these tips, you can make sure that you’re prepared for success during both the good times and the bad.