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What should you invest in during a recession?

Is there such a thing as recession proof stocks? Find out which investments are likely to continue to perform while there's a recession.

There is no such thing as a recession-proof investment, but there are definitely industries, stocks and strategies that tend to perform better in down periods.

The stock market is sensitive to fluctuations in people’s spending, as you’re likely to have noticed with the recent coronavirus outbreak and previous economic downturns. Some stocks can take a dive, but there are other investments considered to be “safe havens” that people usually turn to during a recession.

Here’s what to invest in during a recession, as well as some strategies for investing during economic downturns.

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A “safe haven” investment is typically stable in times of market volatility and is also useful for investors looking to diversify their portfolio, decreasing exposure to riskier assets or investments. However, this doesn’t make the investment risk-free and as with all investing, you could still lose your capital.

Defensive stocks

Defensive stocks, also known as consumer staples stocks, include companies that produce goods that the public will still buy them even when financial times are tough or uncertain. People will aways need these staples. Even when we’re all counting our pennies, we’re still spending money (albeit, less money) on things like healthcare, food and utilities. These are the sectors that are more likely to do well while other sectors struggle. You can invest in these stocks through any trading platform.

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If you’re already a homeowner, a recession doesn’t do you many favours. However, it can offer some investment opportunities if you can purchase while home values are down.

You don’t have to purchase a home to invest in property. You can invest in property investment funds, invest through peer to peer lending, invest with property ISAs or with land banking schemes. We have a handy guide to investing in property without actually buying property.

Precious metals

This is another product you can invest in without actually purchasing any physical goods. Precious metals such as gold and silver tend to continue to perform while there’s a recession. You’re likely to see the prices rise during this time as the demand for them rises, so you need to snap up a good price early on.

Some currencies

Not all currencies are considered safe havens. It generally depends on the government and the stability of their financial system. For example, the Swiss franc is generally thought to be a safe haven because of the stability of the Swiss government. The euro, US dollar and Japanese yen are also thought to be safe havens.

Foreign exchange (usually known as forex) is the market where currencies are traded, with profits and losses made on the changing exchange rate. Think about when you buy holiday cash, then imagine you sell it back a day later when there’s a different rate. That’s basically forex.

Best stocks to buy during inflation

Tips for investing in a recession

  • Play the long game. The most successful investors don’t let times of economic downturn trip them up. They stay invested, even when their portfolio is down due to market volatility because they know that the market always bounces back. (Of course, that’s not to say all individual stocks bounce back, which is why picking your investments wisely during this time is important.)
  • Don’t invest money you need in the short term. If you think you’re going to need your money soon, it’s not wise to invest it in stocks that are going to be unstable to start with. This could lead to you needing the money before the market bounces back, so you’ll have to realize any potential losses.
  • Stick to large-cap stocks. Large-cap stocks (which usually have valuations worth billions of dollars) are usually more stable and less vulnerable to market fluctuations and volatility.
  • Leverage ETFs. ETFs expose you to the market with less risk than stocks do. They automatically diversify your portfolio and spread out your risk. Look at the most resilient sectors and choose an ETF that exposes you to multiple companies in this sector. It’s easier to do well investing in an index that tracks a sector than it is picking specific stocks. For example, if you want to invest only in consumer staples companies, you could buy Vanguard’s Consumer Staples ETF.
  • Look for dividend stocks. Even in times of economic downturn, you will still be paid your dividend. Look at consistency of the dividend paid out, not necessarily yield, as higher yields can have higher risks associated.
  • Eliminate debt and have money saved up for emergencies. You can make additional savings for investing this way, to ensure that you’re not going to need to withdraw if your boiler fails or car breaks down.
  • Avoid the high-risk stocks. Stay a bit cautious when investing during a recession as stocks tend to be a bit more tumultuous. Some industries like tech and non-essentials tend to not perform well during recessions.

The lowdown

There’s not really such a thing as a “recession-proof investment”. Investments are risky. The closest you’ll get to “recession-proof” is safe havens. Save havens tend to be more stable while markets are volatile. Examples of safe havens include:

  • Defensive stocks: healthcare, food and utilities
  • Property
  • Precious metals
  • Some currencies

Guide to investing for the future

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.

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