What investments are recession-proof? (2024)

Key points

Recessions are periods of widespread economic downturn.
Cash, large-cap stocks and gold can be good investments during a recession.
Stocks with sensitive prices and cryptocurrencies can be unstable during a recession.

A global stock market panic and weak U.S. jobs report sparked fears of an impending recession in early August 2024.

This uncertainty may lead investors to consider getting out of the game altogether. They might see the stock market drop and panic-sell. But doing so locks in losses.

A better idea may be to diversify your portfolio further. Adding assets that hold up better during a market downturn could help you weather the storm.

What’s a recession? And are we headed for one?

A recession is a widespread economic downturn typically lasting more than a few months.

The slowing economy leaves businesses with less need to make goods and provide services. Layoffs or hiring freezes might result. People who are out of work typically rein in spending, slowing the economy further. There’s your recession.

To identify a recession, experts commonly look at the country’s gross domestic product. This is the value of goods and services produced there. Two consecutive quarters of negative growth is often considered a recession.

Predicting when a recession might come is difficult. Investors tend to react before a recession begins, which can exacerbate the situation. Panic sell-offs like the one in early August 2024 make a precarious situation appear even worse. Ensuring your portfolio is prepared in case the economy takes a turn can help.

What does ‘recession-proof’ mean?

Something that’s “recession-proof” isn’t significantly impacted by the effects of a recession. While often used to describe jobs, the term can also apply to investments. These include certain companies, sectors and industries that are more resilient during times of economic hardship.

Examples of recession-proof assets

Recession-proof assets can be as specific as certain companies or as broad as entire asset classes or industries. Here are some examples:

Companies with stable cash flow and pricing power, such as Walmart.
Industries with stable demand, such as utilities, consumer staples and health care.
Commodities like gold.

What are the best investments to hold in a recession?

Your investment portfolio may take a hit during a recession. You can mitigate your losses by holding certain assets.

Cash

Cash is an important asset during a recession. Having an emergency fund to tap if you need extra cash is helpful. This way, you can let your investments ride out market lows and capitalize on long-term growth.

Large-cap stocks

Stocks of large, well-run companies that are highly valued tend to perform best during recessions.

“Companies that make products that consumers buy regardless of the economic environment — think diapers and utilities — do quite well because individuals continue buying them,” said Ariel Acuña, founder of LTG Capital, an investment advisor and wealth management firm.

These types of stocks might focus on:

Food.
Personal care products.
Health care.
Utilities.

You need to eat, brush your teeth, go to the doctor and heat your home whether the economy is strong or weak. But that doesn’t mean spending patterns won’t change within a sector.

“With a weaker economy, (people) may shift from steak to hamburger or from shopping at Nordstrom to shopping at Walmart,” said Robert R. Johnson, a chartered financial analyst and finance professor at Creighton University’s Heider College of Business.

Gold

Historically, the value of gold has sometimes increased during recessions. For example, in 1973 and 1974, the stock market fell 17.37% and 29.72%, respectively. During those same years, the price of gold increased 73.49% and 67.04%, respectively. Similar trends can be seen in 2002 and 2008.

Investors may flock to gold when stocks and bonds decline. It can be a sensible investment during times of economic turmoil.

“People tend to put their faith in non-fiat currencies that are not backed by what they perceive as failing central bankers and governments,” said Joseph Sherman, CEO of Gold Alliance, a precious metals supplier.

A basic introduction: How to invest in gold

What should you avoid holding in a recession?

Some assets could help you weather a recession, while others might make it worse. Here are a few assets you may want to avoid during an economic downturn.

Cyclical firm stocks

On the other side of the stock coin are companies whose profits fluctuate with the economy. Johnson described them as “firms whose profits are strongly correlated to the overall economy.” When the economy takes a dive, these stocks tend to follow.

Sectors for these types of firms include:

Construction.
Manufacturing.
Travel.
Leisure.

“Companies that make discretionary products or services tend to suffer in a recession because they may be the first things consumers cut back on,” Acuña said.

Cryptocurrency

Cryptocurrencies are digital assets, alternative forms of payment created using encryption technologies. They function as both currencies and virtual accounting systems. Bitcoin and ethereum are two examples. Cryptocurrencies are generally unregulated, uninsured and difficult to convert into cash.

They can also be extremely volatile. The past two years have seen bitcoin prices reach highs of more than $73,000 and lows of less than $16,000. So crypto isn’t a place to put your money when the economy is shaky.

But it can be part of your portfolio if you can stomach the volatility. Consider crypto as part of your alternative asset allocation. Keep it to a small portion and invest only what you can afford to lose. While this asset class may be gaining traction, much uncertainty remains.

Reacting to sell-offs

It can be tempting to abandon the stock market entirely if you think a recession is imminent. But doing so can translate to significant losses. Maintaining a long-term perspective is important.

“All market setbacks are temporary,” Acuña said. In its almost 200-year history, the market has always bounced back to new highs.

Don’t let a recession scare you out of the market. “View lower prices as opportunities to buy assets at prices (you) may never see again,” Acuña said.

A qualified financial professional can help you build a well-balanced investment strategy to weather a recession.

Frequently asked questions (FAQs)

At the time of writing, the U.S. is not in a recession.

The National Bureau of Economic Research determines when the U.S. economy is in a recession. Its traditional definition is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

Most of the recessions identified by the NBER’s procedures consist of two or more consecutive quarters of declining GDP. But not all of them do.

Diversification can help lessen the blow of financial losses during a recession. Different asset classes — and even assets within classes — perform differently during phases of the economic cycle. Bonds might perform better when stocks are down. Similarly, some stock sectors experience less volatility than others during a recession.

In other words, diversification helps limit your losses in any one part of your portfolio. You may even notice that some of your assets see positive growth.

Your investment portfolio probably isn’t the only thing you’re concerned about during a recession. Many people lose their jobs during economic downturns. Creating an emergency fund is an important step in preparing for a recession.

An emergency fund can help replace your income during a season of unemployment. It also can help you avoid going into debt or tapping your investments to pay your bills.