The markets are experiencing turmoil due to inflation, which drives prices from hotels to groceries and gas. However, this doesn’t indicate that you should stop investing and saving because the near-term economic outlook is unfavourable. To ensure you’re positioned as recession-proof as possible, you might want to take a second look at your portfolio.
Here are the eleven best investments to recession-proof your investment portfolio.
What is a recession?
A recession is a significant decrease in economic activity that lasts for months or even years. Experts proclaim a recession when a nation’s economy sees negative gross domestic product (GDP), increasing levels of unemployment, declining retail sales, and contracting measures of income and manufacturing for an extended time.
It’s also an inevitable component of the economic cycle or the regular cadence of expansion and contraction in a country’s economy.
A recession can also cause investments in stocks, bonds, real estate, and other assets. Business owners may also have lower sales and be forced into bankruptcy.
How to recession-proof your investment portfolio
Another recession is almost inevitable. It’s just the way that the world, economy and finances work. And the question is not whether but rather when.
Sadly, many investors have no plan, even though a shift in the economy can be significant if you’re positioned to benefit from it.
In times of economic unrest, investors should prioritise the long term and stick to their investing strategies. It’s a tricky game to invest in equities and time market downturns actively if you don’t know what you should invest in, but once you know which investments perform well, you can find the best opportunities.
Best Investments to Recession-Proof Your Investment Portfolio
Commodities are essential goods and materials that are widely used and aren’t meaningfully differentiated from one another. Bushels of wheat, barrels of oil, and megawatt-hours of electricity are a few examples of commodities.
Considered a potential hedge against inflation, commodities give investors a few options to invest. The easiest, perhaps less risky, is through a mutual fund that invests in companies dealing with commodities such as mining, energy or agricultural companies.
Pharmaceuticals, a subset of the healthcare industry, are usually considered “defensive” and “durable,” along with other sectors like utilities.
Numerous factors contribute to this, but the most significant is that people don’t pick when they will become ill and don’t choose when to purchase medication. This implies that they’re buying it despite economic downturns.
3. Technology Startups
Technology startups aren’t always considered traditional defensive play during a recession.
However, the COVID-19 recession might be different.
According to Sean Markowicz, “as more people continue to be locked down, this has resulted in increased demand [for digital services], and this has created a virtuous cycle for their revenues, and that has resulted in superior stock market performance.”
4. Grocery Stores
Due to their low-profit margins, grocery businesses can be risky investments.
However, grocery businesses frequently experience increased sales and profitability during recessions.
Customers tend to buy more groceries and eat at home when they reduce their restaurant spending. People still need to eat, even in the deepest recessions, and grocery shops offer this essential service at a lower cost than restaurants.
5. Utility Stocks
Utility stocks are defensive, essential investments. Even during a recession, there will always be a need for the service utilities offer.
Because utility stocks are less volatile than the rest of the market and offer fewer opportunities to profit quickly, investors and traders are typically not interested in them.
However, they’re one of the few industries where investors can safely save money during a recession. Utility stock prices were stable compared to other sectors, dropping by double digits or into negative territory.
6. Precious Metals
When the stock market is falling and there is general economic unease, precious metals like gold and silver are frequently in demand. This is because they’re regarded as a “store of value” or something that investors can physically cling onto while the value of their intangible assets, such as stocks, declines.
Since gold doesn’t offer a dividend, it becomes more appealing when other investments aren’t producing much income. Gold tends to climb when interest rates are low.
And although historically, gold’s value has occasionally been initially reduced at the outset of a recession, it is reasonable to anticipate that, for the most part, it will recover and gain in value throughout the downturn.
7. Rental Properties
Real estate as an investment isn’t remarkably recession-proof.
However, rents don’t drop during recessions. No matter how the GDP changes, people still need a place to live.
As fewer individuals can afford to buy homes and become homeowners, recession-proof might increase demand for rental properties.
8. Certificates of Deposits
Banks and credit unions offer certificates of deposit or (CDs). This product provides a higher interest rate for the customer’s promise to leave a lump-sum deposit untouched for a specified time.
CDs are regarded as low-return investments, but the return is assured at the current interest rate even if market rates fall.
To receive the most value for your money, purchase a CD greater than the inflation rate when looking for one because standard CDs aren’t insured against inflation. The interest rate will increase as the CD’s term lengthens.
Although CD interest rates aren’t the highest in the debt instrument market, they’re higher than most savings and money market accounts.
And despite not having the same growth potential as equities or debt investments, CDs don’t have the same downside risk. CDs can be an excellent option if you have money that you absolutely must have an increase in value even during a recession, even if just slightly.
9. Educational Courses
Investing in oneself might occasionally be the best investment during a recession.
Use this time to pick up a new skill or join a career-focused group instead of worrying about where stocks, bonds, or gold is trading. You might become more appealing to employers looking for top talent to help them out of the recession by expanding your skill set.
10. Waste Disposal Companies
Regardless of the overall status of the economy, humans produce trash and don’t want it around; hence waste removal businesses are often seen as defensive.
Waste disposal is an excellent investment during a recession because weekly trash pickups usually continue across the country regardless of the economic climate.
Diversification spreads your recession-proof investments around so that your exposure to any one type of asset is limited. This strategy is designed to help reduce the volatility of your portfolio over time, balancing risk and reward in your investment portfolio.
According to Anthony Watson, diversification is essential when preparing for a recession.
You can remove company-specific risk by choosing funds over individual companies. Because you won’t necessarily notice one firm going under among 4,000 others in an exchange-traded fund.
In diversifying your portfolio, try a portfolio of investment pairings that aren’t significantly correlated, meaning where one goes up, the other goes down, and vice versa (like stocks and bonds). This implies that you should consider asset classes and stocks in businesses unrelated to your career or primary source of income.
A recession may result in significant losses.
However, understanding the business cycle can help you learn that downturns are a normal part of a functioning economy.
And when the economy starts to exhibit signs of a recession. It’s crucial to create a risk management strategy depending on your financial situation.
In a recession, remember that some stocks can still perform well; you just need to know which ones.
If you want to know more about how and what to invest during a recession, give us a call today.
Rest assured that someone will get in touch with you and answer all your questions.