In October 2022, a recession seems imminent.

With rising inflation and corresponding interest rate hikes by the Federal Reserve, it seems inevitable that the economy will eventually face major challenges. In fact, Bloomberg economists predict that by October 2023, the likelihood of a recession is almost 100%.

It is now December 2023, and the economy is not only standing, it is booming.

No country in the Group of Seven (G7) has had a better economic performance since the start of the epidemic. Unemployment remains near record lows despite massive strikes in the labor market. The Nasdaq Composite is up over 35% this year.

So, are we safe? Not quite yet.

Despite these signs of resilience, a recession could still be imminent – historically, it has happened on average every seven years. That’s why it’s crucial to plan ahead and consider how you should manage your investment strategy when the next recession occurs.

To prepare for a potential downturn, diversification is key. By spreading your investments across different asset classes, sectors and geographies, you can reduce risk and increase return potential. Defensive investments, such as utilities, consumer necessities and healthcare stocks, tend to perform better during economic downturns due to their stable demand. In addition, consider incorporating bonds and other fixed-income securities, investments that can provide stable income and lower volatility.

During times of economic uncertainty, it is also wise to focus on high-quality companies with strong balance sheets and stable cash flows. These companies are typically more resilient during economic downturns and can continue to pay dividends and provide a reliable source of income. Additionally, keeping a portion of your portfolio in cash or cash equivalents provides flexibility and the opportunity to invest in undervalued assets when markets recover.

In this blog, we will explore the complexities of investing during times of economic uncertainty. This includes the potential advantages of investing during a recession, key considerations, and six potentially recession-resistant investment strategies for you to consider incorporating into your investment strategy.

Strategies for Investing During a Recession

A recession is typically defined as two consecutive quarters of declining real gross domestic product (GDP). However, it encompasses more than just economic statistics. Recessions bring about various challenges, such as high unemployment rates, reduced consumer spending, and decreased business investments.

In the 21st century, we have already experienced three recessions: the dot-com crash of 2000-2001, the Great Recession of 2007-2009, and the brief Covid-19 Recession of 2020.

Given the cyclical nature of economies, the question is not if another recession will occur, but when.

Therefore, it’s essential to refine your investment strategy and capitalize on the unique opportunities that often emerge during economic downturns. In this section, we will explore strategies to help you navigate and potentially benefit from the dynamics of a recessionary environment.

Assess Your Risk Tolerance

During a recession, financial markets may experience significant volatility. Before investing, assess your tolerance for possible temporary losses in your portfolio.

Are you investing for long-term retirement savings, major purchases or other goals? Your goals will have a direct impact on your risk tolerance. For long-term goals, you may be more willing to tolerate short-term market fluctuations.

If you want to keep your risk at a manageable level, then you need to consider diversifying your portfolio. Determine the appropriate asset allocation based on your risk tolerance and financial goals. For example, if you have a low risk tolerance, you may be able to allocate more of your portfolio to less volatile assets such as bonds, rental properties and precious metals.

Consider Dollar-Cost Averaging

Dollar-cost averaging (DCA) is an effective strategy that can provide stability during the emotionally charged periods of a recession.

With DCA, you regularly invest a fixed amount of money, irrespective of the market’s fluctuations. This consistent approach persists even during economic downturns when asset prices typically fall, potentially leading to lower average costs over time.

The primary advantage of DCA is its ability to remove the necessity of market timing. By investing consistently, you benefit from the market’s natural cycles.

Moreover, DCA encourages disciplined and unemotional investing. By distributing your investment over time, it helps prevent the urge to invest a large sum all at once, which can protect you from sudden market declines.

One practical way to implement DCA is to set up automatic, regular contributions to your 401(k), IRA, or other investment accounts. This strategy allows you to maximize your retirement contributions while maintaining a consistent investment approach, regardless of economic conditions.

Be Prepared to Capitalize on Lower Asset Prices

During a recession, asset prices often decline across various markets, including stocks, real estate, and certain commodities.

For instance, during the global financial crisis, stock prices plummeted. Even shares of fundamentally strong companies like Apple and Amazon experienced significant declines. Investors who took advantage of these lower prices and held onto their investments have seen substantial returns as these companies recovered and continued to grow.

Similarly, the real estate market was severely impacted during the 2008 financial crisis, with property values dropping significantly. Those who purchased properties during this downturn benefited from the market’s eventual recovery and the subsequent rise in property values.

Timing the market is notoriously difficult. However, maintaining liquidity during a recession, when others might not be able to, can provide an advantage. It enables you to purchase undervalued assets and potentially reap significant gains as the market recovers.

Are There Recession-Proof Investments?

Let’s get one thing straight: there is no such thing as a recession-proof investment.

That said, there are certain types of assets that have historically weathered the effects of recessions better than others. These include:

Healthcare, Pharmaceutical, and Biotechnology Companies 

Even when the economic outlook is uncertain, one trend is clear: the United States population is aging.

Since 1960, the US fertility rate has dropped to less than half of its peak, falling well below the replacement level. This has resulted in a stagnation of the child population over the past decade, while the proportion of residents aged 65 and older has increased by more than a third.

Although this demographic shift poses certain challenges for the future, it may also offer relatively recession-resistant growth opportunities for healthcare and pharmaceutical companies. Healthcare costs for individuals aged 65 and older average over $11,000 per year, nearly three times the amount spent on those in their 20s and 30s.

The demand for medical treatments and medications remains steady even during economic downturns, as these needs are essential rather than discretionary.

Additionally, continuous research and development in the pharmaceutical and biotech sectors can create new growth opportunities that are less dependent on economic cycles. These innovations benefit from special protections: government and insurance funding for healthcare expenses, along with regulatory safeguards like patents, provide stability to the industry.

Cryptocurrencies

When a recession hits, hyperinflation often follows.

While the United States has never experienced hyperinflation, dozens of countries around the world have, including Austria, China, Turkey, and Zimbabwe.

Recessions themselves do not directly cause hyperinflation. However, they can expose underlying economic weaknesses, such as flawed monetary policies or excessive money printing, which can then lead to hyperinflation.

In the 1980s and early 1990s, Argentina found itself in a relentless cycle of recessions and economic turmoil. The government’s monetary policies inadvertently triggered a prolonged period of hyperinflation. Supermarkets struggled to keep shelves stocked, and grocers had to update price tags multiple times a day. At its peak, the inflation rate soared to an astonishing 2,600% annually.

More recently, in the 2010s, Venezuela faced an economic recession brought on by falling oil prices and restrictive policies on production. The government’s short-term solutions exacerbated the problem, leading the country into its ongoing hyperinflation crisis.

The rise of cryptocurrencies like Bitcoin and Ethereum has transformed the financial landscape. Before these digital currencies, residents of countries experiencing hyperinflation had limited options to protect their wealth from rapidly depreciating local currencies. Now, they have an alternative.

Although cryptocurrencies are often criticized for their high volatility and limited regulatory frameworks, they may offer a more stable alternative compared to a rapidly depreciating national currency. The growing acceptance and integration of blockchain technology and cryptocurrencies across various sectors are likely to sustain interest and investment in these digital assets.

Cash and U.S. Treasury Bonds

When market opportunities arise, liquidity is essential to capitalize on them. Therefore, cash and U.S. Treasury Bonds are crucial components of a recession-resilient investment strategy.

Cash offers unmatched liquidity, enabling swift responses to financial changes, whether it’s covering expenses during periods of reduced income or seizing market opportunities during downturns. Maintaining a cash reserve acts as a financial cushion, helping manage living costs without the need to sell investments at unfavorable prices during economic challenges.

For example, Warren Buffett’s Berkshire Hathaway held substantial cash reserves leading up to the 2008 financial crisis. This allowed Buffett to make opportunistic investments, such as buying stakes in companies like Goldman Sachs and General Electric at significantly reduced prices. As the market recovered, these investments yielded substantial returns.

U.S. Treasury Bonds, on the other hand, are highly sought after during recessions due to their safety, reliability, and liquidity. Issued by the federal government, they offer a virtually risk-free way to preserve capital and receive steady returns, with minimal default risk. These bonds are backed by the full faith and credit of the U.S. government, which has never defaulted on its debt.

Consumer Staples

During recessions, consumers tend to prioritize spending on essential items, reducing their discretionary purchases.

This shift in consumer behavior benefits consumer staples companies, as their products are considered necessities. As a result, these companies often experience steady demand for their products, helping them maintain consistent revenue streams even during economic downturns, while other firms struggle.

For instance, Procter & Gamble, a multinational consumer goods corporation known for its wide range of personal health, consumer health, and hygiene products, demonstrated resilience during the 2008 recession. While the S&P 500 dropped by approximately 38.5% in 2008, P&G’s stock declined by only about 15%.

Similarly, Walmart, the multinational retail corporation, actually saw growth during the 2008 recession. Its fiscal year 2009 sales increased by 7.1% to $401 billion, and its net income rose by 5.8% to $13.4 billion. Walmart’s success during the recession was likely due to its focus on low prices, which attracted cost-conscious consumers.

Real Estate

Real estate is a tangible asset with inherent value. Even during economic downturns, people still need places to live, particularly near their schools or workplaces.

Income-generating real estate, such as rental properties, can continue to produce rental income. In fact, housing markets often struggle during recessions, leading more people to opt for renting, which can help keep rental markets robust.

For instance, during the 2008 financial crisis, rent prices continued to rise while the stock market plunged. Investors who owned multi-family units benefited from steady rental income, as the demand for affordable housing remained strong even during the recession.

Properties located near universities tend to stay stable during economic downturns. As job opportunities become scarce, many people see recessions as a good time to return to school, thereby increasing the demand for housing in these areas.

However, investing in real estate during a recession requires thorough market research and effective property management. The stability of a rental market can depend on various factors, including local employment rates, population growth, and the overall economic health of the region.

For more detailed information on investing in real estate during a recession, watch our webinar, “Real Estate Investing Lessons From Past Recessions.”

Precious Metals

Much like cryptocurrencies, precious metals can serve as a safeguard against the risks of hyperinflation.

These assets have a unique capability to not only maintain their value but often increase in worth when traditional assets such as stocks and bonds decline. Additionally, the high liquidity of gold and silver allows for quick conversion to cash when needed.

However, investors should approach precious metals with caution. These assets have certain disadvantages, including the inability to generate income, storage costs, and inherent price volatility.