Recession-proof investments do exist, and they’re not very hard to find if you know where to look.
Depending on your definition, recessions are as much a part of American history as Apple pie. In fact, just after the Revolutionary War, the fledgling country fell into what some historians regard as the first of dozens of recessions. The Panic of 1785 was the result of post-war deflation, and (in non-historian terms) the fact that we couldn’t get our act together. Economic panic and recessions followed in 1789, 1796, 1802, 1807… you get the idea.
The first official recession, as recorded by the Library of Congress, began on August 24, 1857 with a report that “the entire capital of the [Ohio Life Insurance and Trust Company] home office had been embezzled.” Even in the last 50 years, we’ve recorded seven recessions, most notably the Great Recession that began at the end of 2007, and the economic shutdown of 2020 due to the coronavirus pandemic.
Given the steep market declines that seem to happen on a regular basis, it’s no surprise that people are looking for recession-proof investments to keep in their portfolios. It’s important to remember that there’s always a risk when you put money in the market, and you always have the potential to lose money. However, there are investing strategies that will limit your risk and give you some modicum of security.
Where to find recession-proof investments
Let’s define recession and put it into layman’s terms so that we can be clear on what we’re referring to. A recession is characterized by two successive quarters of falling gross domestic product (GDP). More easily defined as a significant decline in economic activity spread across the economy, lasting more than a few months.
Even though almost all industries suffer during a recession, market collapses can come in many varieties. The 2008 crash hit all stocks hard, but the worst damage was done to stocks of financials, housing-related companies and businesses with high debt or business models based on borrowing. The 2000 crash hit tech companies particularly hard, which was especially devastating for investors who owned mostly dot-coms.
In situations like these, a portfolio with a good mix of recession-proof investments would feel some pain, but not to the extent that a portfolio overloaded with “hot” stocks might. Here’s the problem, though.
When the market looks enticing, many investors become so excited that they buy stocks willy-nilly, with no thought to creating a balanced portfolio. And when the market drops, they freeze, not knowing whether they should continue to buy more shares to take advantage of the lower prices or just bail out and sell everything. And the sad result is usually this: When under pressure, investors will generally make exactly the wrong decision!
So the goal is to put together a portfolio that’s diversified enough that you aren’t overly susceptible to a collapse in any one industry. Similarly, keep your portfolio weighted more heavily in recession-proof investments. Think of it like a food pyramid: where you would find the dietary staples of grains, vegetables and meat on the food pyramid, put blue chips, dividend aristocrats, utilities and other low-risk, low- and medium-yielding investments. These investments should make up the safe, reliable foundation of your portfolio. Higher-yielding, higher-risk investments can then be added in smaller amounts according to your risk tolerance.
Even if you do lose money in a recession, there is good news. In the most recent recessions, dating back to 1980, stocks bounced around and finished recessions at higher points from where they started, except for the 2008 recession, which was clearly caused by a larger economic problem that dragged stocks down until March of 2009. But even then the market climbed steadily, eventually surpassing its starting point. It just took a little longer.
That said, you can lower risks with investment vehicles such as mutual funds and exchange-traded funds (ETFs), which have built-in diversification by having small positions in dozens or hundreds of stocks.
What do recession-proof investments have in common?
Recession-proof investments can come from almost anywhere, but they tend to have a few commonalities. Here are some of the traits that can make a stock act like a safe haven during turbulent times.
Volatility is basically a proxy for risk. Stocks that are more volatile have larger price swings, percentage wise. The least volatile sectors? Consumer staples and consumer discretionary stocks are some of the most recession-proof investments. Consumer staples are things like groceries, personal care products and household items that people tend to buy regardless of economic conditions. The sector includes many high quality blue chip stocks, like Procter & Gamble (PG) and Colgate Palmolive (CL).
Some stocks are more cyclical than others, meaning they’re tied to industry or economic cycles. Oil stocks, for example, are very cyclical.
Many recession-proof investments are also attractive over the long-term because they pay reliable dividends. Dividends are an indicator of reliability: they mean the company’s business generates predictable income during a variety of economic conditions.
Small but reliable yearly payouts will add up impressively over just a few years. Buying $1,000 worth of a 2.9%-yielding stock today, for example, will earn you $145 in dividends over the next five years (even without any dividend increases). You will have earned 14.5% of your original investment in dividends by buying a 2.9%-yielding stock—and holding.
If you’re investing after retirement, you need to ensure that that income will continue even during periods of major price declines. Most dividend stocks fit the bill.
It’s still important for all investors to have a crash contingency plan in place—especially if you’re a retiree who depends partly on your investment income to cover living expenses.
Look at your holdings individually. What type of event would be the worst-case scenario for each one? Do you have other holdings that would also be devastated in this situation? Be frank with yourself. If you have too many holdings with similar risk factors, you probably need to diversify.
What do you look for in recession-proof investments? Share your thoughts in the comments below.
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