Investing during a recession sounds risky. But then, every investment comes with some degree of risk, which is why you need the skills and the guidance to make sound financial decisions. Thanks to the volatile nature of investing, you’ll never find a “recession-proof” investment, but you can still learn how to make money in a recession. Here’s how.
Is America in a Recession?
First, what exactly is a recession? A recession is a widespread economic downturn, typically lasting months, sometimes even years. Common features include:
- Negative gross domestic product (GDP)
- Rising rates of unemployment
- Falling retail sales
- Declining income
- Contraction (decline) in manufacturing
Some of these features are simply a part of the normal business cycle, but when they happen for extended periods, they can significantly impact American workers and their families.
Economists aren’t exactly in agreement on whether America is experiencing a recession in 2022. But The New York Times has recently summarized America’s chances of a recession as being “uncomfortably high.” Experts point to rising inflation rates, the ongoing supply chain crisis, and instability in the job market as areas of concern.
The Risks of Investing During a Recession
Investors are cautious about investing during a recession, and understandably so. The prospect of large gains diminishes considerably during an economic downturn, and small startups have significantly less chance of rising to prominence.
If you invest in dividend stocks, a recession can likewise mean that companies simply won’t have a surplus to draw from, so you won’t see any dividend payments until a recession is over.
How to Make Money in a Recession
The risks of recession investments can’t be ignored, but that doesn’t mean that investors should avoid investing altogether. In fact, as stock prices drop, you may even be able to snag some shares of popular stocks at historically low prices.
The trick, of course, is knowing what kind of stocks to buy in a recession. The following guidelines can help you learn how to make money during a recession and ensure you can ride out the storm, no matter what the economy brings.
Focus on Large-Cap Stocks
A recession isn’t really the best time to roll the dice on that new, trendy tech startup. Instead, focus on large-cap stocks, companies whose valuations are $10 billion or more. These companies tend to be resilient in the face of dips in the overall economy.
Additionally, if you do decide to take a risk on a startup investment, large-cap stocks can help you stabilize your portfolio and mitigate risk.
Look for High Performers
Even when the market is in decline as a whole, some companies will continue to outshine the competition. Look for companies that outperform market indices such as the S&P 500 or the Nasdaq.
Ideally, you’ll want to ensure that these companies have demonstrated strong performance over a period of time — say, a year or so. Granted, there’s no guarantee that their success will continue, but these stocks may actually provide a lifeline during a period of recession.
Consider Preferred Stock
Where possible, invest in preferred stock. Preferred stock shareholders don’t get the same voting rights as those who invest in common stock, but preferred stock comes with several distinct advantages.
For starters, preferred stock pays dividends, which makes them similar to bond payments. The “preferred” nature of the stock means that stockholders will receive payments ahead of common shareholders.
Best of all, if the company should go under, preferred shareholders will receive a payout ahead of common shareholders. This makes preferred stock a lower-risk investment during a recession.
Find a Fund that Tracks a Specific Sector
During a recession, some stocks will perform better than others. Consumer staples stocks, for example, tend to resist major economic changes, and real estate tends to likewise remain stable despite market volatility.
Many stock brokers will offer mutual funds or exchange-traded funds (ETFs) that specifically track these sectors. For example, you could invest in an ETF that consists of a bundle of consumer staples stocks, or you could consider a mutual fund that contains shares of energy companies.
The advantage is that these funds provide a bundle of stable stock picks that can help you weather an economic recession. Just be careful that your portfolio also contains other assets since these funds offer little in the way of diversification.
Explore Dividend Stocks
Companies pay dividends out of their surplus income, which means that during a recession, these payments can easily dry up. But when companies continue to pay dividends, investors can use this money as a source of passive income.
Dividends might be particularly important during a period of profound inflation. The extra revenue you generate from dividend stocks might help you offset the higher cost of gasoline or other consumer essentials. If nothing else, you can always reinvest your dividends into the company or use the extra cash to make another investment.
Explore Foreign Stocks
Other countries aren’t impacted by the same kinds of economic factors that affect American businesses. It may pay to look into foreign stocks whose markets aren’t experiencing the kind of volatility that the market is stateside. Be careful, though, as certain global events can still cause uncertainty in foreign stocks, and there’s no guarantee that other countries won’t also be affected by their own economic hardships.
The Best Stocks to Buy in a Recession
Knowing how to make money during a recession is often about knowing which stocks to buy in a recession. There are no recession-proof stocks, but some sectors will be more resilient than others. Here are some of the best recession investments available today:
- Health care
- Consumer staples
- Information technology
- Communication services
- Financial companies
- Real estate
- Utilities and energy providers
Each of these categories represents industries that supply necessary goods and services, regardless of the shape of the American economy. Consumer staples stocks, for example, entail consumer products such as food and beverages, but it also refers to the grocery stores and retailers that distribute them. Costco, for example, has demonstrated strong performance, thanks to its membership program and reputation as a discount retailer.
Additionally, with the price of houses on the rise, many Americans are choosing to renovate their existing home rather than shopping for something brand new. Others are finding that they can stretch their budgets by purchasing a fixer-upper and making improvements over time. The point is that building supplies (e.g., Trex, known for their composite decking materials) might also be a smart investment during this period.
Don’t Panic
Investing during a recession can be a scary experience. The media seems to be constantly filled with stories of doom and gloom, all of which can shake your confidence.
Fear can be a powerful motivator. On the one hand, it can prompt you to cut your losses and jettison an investment that’s not performing well. But making decisions based solely on emotion is hardly a wise investment strategy.
Instead, stay the course. Invest well. And remember, your best gains happen over the long term. Recessions will always happen, and even Yale economics professor Robert Shiller admits that “there are better decades than others.” An economic recession is a temporary setback, but investment wisdom can last a lifetime.
Do Better Research
One of the best ways to implement the advice in this article and make money during a recession is to invest in a Gorilla Trades membership. Our members get access to advanced content and resources to perform better research and make the most out of every investment. Sign up today, and you’ll receive 30 days of free stock alerts.
