By: Gerelyn Terzo of Sharemoney

It’s a challenge to navigate the financial markets in any economy, let alone a recession. Investors could get whiplash trying to time the market, so we thought now would be the perfect time to discuss ways to invest in a recession. With high inflation and volatile markets, a diversified investment portfolio is key. 

Economists have been warning about a looming recession for months, but one has yet to surface. However, companies in high-growth sectors like technology have been laying off workers fast and furiously, which suggests corporate America could be bracing for an economic slowdown.

One of the themes to adhere to when investing in any economy is diversification, but this is especially true when a recession could be up ahead. By diversifying the assets in your investment portfolio, you’re increasing the chances that one asset class will perform well enough to offset any weakness in another category. It’s a way to protect yourself when there’s uncertainty at every turn. 

Without further ado, let’s dive into ways to invest during a recession so you can continue protecting and building your wealth even in an uncertain economy.  

Fixed Income 

One of the most secure ways to invest during a recession is in fixed income securities like bonds or Treasuries. Fixed income is a defensive way to play the market, which might not be a bad idea in the current environment. If you’re looking to produce an additional income stream, investing in fixed income in a recession could be a good approach to take. 

In fact, fixed income assets are looking increasingly attractive in the current rising interest rate environment. Take the 2-year U.S. Treasury note, the rate for which climbed from less than 1% in early 2022 to 4.5% as of the final quarter of the year. It’s only one example but it’s one in which your principal investment is secure and you are earning interest that’s higher than many high-yield savings accounts.

In addition to Treasuries, investors might consider corporate bonds. These securities tend to be riskier than government bonds but generally less risky than stocks. To avoid excessive risk, choose corporate bonds issued by companies with investment-grade credit ratings, as they have a low likelihood of default (which would leave investors holding the bag). 

If inflation has got you down, you might want to consider Treasury-Inflation Protected Securities, or TIPS, which act as a hedge against inflation and protect your purchasing power. 

Gold: A Store of Value 

Precious metals are another way to play an economic slowdown. Gold, in particular, is meant to serve as a hedge against inflation, which has been running rampant in the economy. It has the potential not only to store wealth but also to grow it as demand for precious metals increases. 

However, short-term investors may be disappointed. Gold doesn’t always live up to its reputation as an inflationary hedge. In 2022, all bets were off as the precious metal lost modest ground for the year. Over the long term, gold has performed better. In the past decade, the gold price has risen over 15%. If you are willing to be patient and invest for the long haul, gold has lived up to its reputation as a store of value.  

In addition to gold mining stocks, investors might consider exchange-traded funds that track the performance of the gold market, a list of which you can find here. 

Stocks 

Stocks are a volatile asset class by nature, but they’ve been exhibiting this behavior in earnest lately. However, just because stocks take you on a roller coaster ride doesn’t mean you have to avoid them altogether, as there could be opportunities, too. Depending on your risk tolerance and investment time frame, there might be stocks that are worth buying despite a possible recession. 

Dividend stocks pay income on top of any potential capital gains. If the stock price falters, at least you continue to get dividend checks in the mail, considering the company’s balance sheet remains intact. Many companies and their boards of directors take pride in their dividend history and will not interrupt them unless they have no other choice. 

But you don’t have to limit yourself to dividend stocks, either. Blue chip stocks are yet another way to go. These are the stocks of companies that are household names like Coca-Cola or even tech giant Google, for example. They have a proven history of being stable and experts suggest they aren’t going anywhere anytime soon. 

Historically, certain sectors of the economy have proven to be resilient in a down economy. While there’s no guarantee that they will repeat this in the future, these companies could be another way to play defense in an uncertain market.  

Recession-resilient stocks have historically included consumer goods companies. These are brands behind products that stay in demand regardless of the economy, like shampoo and detergent, unlike other categories like electronics or home improvements. Healthcare is another sector that is shielded from any economic slowdown, as people will continue to seek medical help even in an economic downturn. Discount retailers might also be in fashion as consumers look to save money by shopping here instead of in department stores.

Real Estate Funds 

If you’ve always wanted to invest in real estate but aren’t in a position to manage the property, another way to do this is through funds known as real estate investment trusts, or REITs. These funds have proven to deliver returns even in the face of an economic recession. Furthermore, they have a lower financial barrier to entry, making them a great option for those trying to enter the investment space. Real estate investing for beginners can be challenging and risky; REITs provide the perfect solution.

According to the National Association of REITs, an index that tracks REITs (without mortgages) delivered annualized returns of almost 16% during recessions and close to 23% in the year after a recession. Interestingly, in the year leading up to a recession, private real estate funds have outperformed REITs. 

Conclusion

So far in 2023, the economy has proven to be resilient. However, economists have warned that an economic slowdown could emerge in the second half of the year. In the meantime, investors have plenty of ways to prepare and diversify their portfolios to withstand any potential headwinds. Whether it’s select stocks, low-risk bonds, real estate, or gold, there’s no shortage of ways to invest even in a recession. 

Please note this is not investment advice but rather a starting place from which you can do your own research.