8 Best Investment Strategies During A Recession

Wayne Duggan

For more than a decade, making money investing in stocks has been extremely easy. A combination of robust economic growth and record-low interest rates has made it easy for U.S. companies to thrive and stock prices to rise.

However, making (or preserving) money in the market during a recession is a much more difficult prospect, and successful investors often take a completely different approach to the market during an economic downturn.

A recession is a general decline in economic activity over an extended period. Many define a recession as two consecutive quarters of negative GDP growth.

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Whether it's the first recession you’ve experienced firsthand or your portfolio has gotten burned badly in previous recessions, here are eight recession investing strategies that could help you navigate the downturn.

1. Do Not Dump All Stocks

When a recession hits, stocks underperform in the near term. But while it may seem like a good idea to sell all the stocks in your portfolio, selling them when they are down is rarely a good idea.

If you’re losing sleep over the day-to-day fluctuations in the stock market, it may be a good idea to dial back your exposure to stocks. It’s likely a sign you had too much of your investments in stocks in the first place. However, recessions are a relatively routine occurrence in the market. In fact, there have been 33 U.S. recessions since 1854 (about one every five years), and investors who held onto stocks or bought the dip eventually came out ahead every single time.

2. Reassess Your Holdings

Once again, everything looks like a good investment when the economy is booming and the credit market is flowing. When a recession appears imminent, investors should take a fresh look at all their stocks and other holdings and remember why they invested in the first place. Ask yourself what was your thesis on each stock you own when you bought it. Has the near-term economic outlook fundamentally changed that thesis? Or has it simply created a near-term hurdle for the company to overcome?

The coronavirus sell-off may have hurt the near-term outlook for Apple, Inc. (NASDAQ: AAPL), but iPhone demand will likely ultimately be just fine in the long-term.

3. Buy Consumer Staples

Every stock is at risk during an economic downturn. Even stocks that don’t lose money are at risk of experiencing earnings multiple compression. However, certain stocks have businesses that are not cyclical in nature and are relatively insulated from economic downturns.

Consumer staple stocks are historically relatively good investments during stock market downturns. Americans may buy fewer gadgets or go on fewer vacations during a recession. But they will still buy toilet paper, shampoo and trash bags.

Discount retailers like Walmart Inc (NYSE: WMT) sell these products, and their low prices appeal even more to shoppers when the economy is on shaky ground.

4. Raise Cash

One of the best ways to get defensive during a recession is to increase your cash position. Cash provides the ultimate flexibility and the most peace of mind when times get tough in the market.

The U.S. dollar is the closest thing to a zero-risk asset over the short term. However, given interest rates on savings and money market accounts have recently plummeted to near zero, investors likely won’t be able to offset inflation over the medium to long-term. In other words, your cash slowly loses buying power to inflation the longer you hold it.

5. Buy Dividend Stocks

Following two emergency Federal Reserve interest rate cuts in March, the yield on 10-year U.S. Treasury bonds has fallen all the way to 0.8% (at time of publication). Income investors have few choices these days other than buying dividend stocks, which have historically been good sources of income during recessions. The only thing dividend stock investors must watch out for during an economic downturn is dividend cuts.

For example, Boeing Co (NYSE: BA) completely suspended its 6.8% dividend on March 27. To minimize the risk of buying a stock in danger of a dividend cut, look for stocks with positive free cash flow, stable earnings, low debt levels and a relatively low payout ratio.

6. Buy Utilities

One of the more defensive sectors to buy during a recession is the utilities sector.

Like consumer staples, even in a worst-case scenario, Americans will do everything they can to keep the lights on and the water flowing in their house. Many utilities have rates set or limited by regulations, meaning their pricing and margins are relatively stable even during a downturn. In addition, utility stocks often trade at low earnings multiples, suggesting valuation protection to the downside.

Finally, utility stocks are known for their dividends and can generate income for investors assuming they pass the dividend risk test mentioned above.

See Also: 7 ETFs To Buy In A Recession

7. Consider Your Investing Time Horizon

If you’ve been reading about different recession investing strategies from different sources and finding conflicting information, it may be because the two sources are making recommendations based on two different investing time horizons.

Younger investors that can be patient for years or even decades can afford to be more aggressive in buying stocks. Stocks are extremely unpredictable in the short term, but have historically been extremely consistent over the long-term (30+ years). Investors that need access to cash for retirement or a large purchase within the next several years should take a more cautious approach to investing, sacrificing potential upside to reduce risk.

8. Have A Watch List

It’s extremely difficult to make rational decisions on a day where the S&P 500 is up or down 5% or more. Investors that make buy and sell orders based on fear and/or greed typically don’t perform well over the long term. One way to avoid impulsive trades is to create a watchlist of stocks you are interested in buying well before they hit your target prices. By creating a watch list, you can take your time in performing your due diligence in learning and analyzing a stock well in advance of when you actually pull the trigger.

During the next big down day in the market, you don’t have to scramble to react. Just trust in the work you put in beforehand and buy the stocks on your watchlist.

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