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What to Invest in During a Recession: 4 Ideas

There’s no such thing as a “recession-proof” investment, but some types of stocks, funds and strategies could help your portfolio better weather an economic downturn.

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Some stock market sectors, like health care and consumer staples, generally perform better than others in a recession.

Healthy large cap stocks also tend to hold up relatively well during downturns.

Investing in broad funds can help reduce recession risk through diversification.

Bonds and dividend stocks can provide income to cushion investors against downturns.

Health care and consumer staples stocks

Large-cap stocks

Funds that track specific sectors

Dividend-yielding or fixed-income investments

The thought of investing during a recession can be frightening, but it doesn’t have to be — if you know what to look for. Choosing what to invest in during a recession will first require you to consider your personal goals. Are you looking to:

Minimize the risks of stock market volatility?

Maximize long-term returns?

Create a source of fixed income?

Invest in the stock market while prices are low (also known as buying the dip)?

Building a portfolio that incorporates all of these strategies may be ideal, but successfully tackling any of them could have a significant positive impact on your financial future.

What happens during a recession?

Typically, recessions occur after periods of economic growth. Several factors can cause recessions, including inflation, political unrest and reduced spending.

The National Bureau of Economic Research, which is the official "scorekeeper" of U.S. recessions, defines a recession as "a significant decline in economic activity that is spread across the economy and that lasts more than a few months."

The bureau uses a variety of measures, such as personal income, employment and industrial production, to gauge recessions.

Some recessions are mild while others are severe. Job loss, rising unemployment and production drops often accompany recessions.

Brokerage firms

on Charles Schwab's website

on E*TRADE's website

on Vanguard's website

on Fidelity's website

4 investments to consider during a recession

While no investment is guaranteed to be recession-proof, some tend to perform better than others during downturns.

Some stock market sectors, such as health care and consumer staples, generally perform better than others in a recession.

Healthy large-cap stocks also tend to hold up relatively well during downturns.

Investing in broad funds can help reduce recession risk through diversification.

Bonds and dividend stocks can provide income to cushion investors against downturns.

Health care and consumer staples stocks

There are 11 stock sectors:

Communication services.

Consumer discretionary.

Consumer staples.

Energy.

Financials.

Health care.

Industrials.

Information technology.

Materials.

Real estate.

Utilities.

During a recession, some sectors tend to outperform others as consumer needs shift. Delia Fernandez, a certified financial planner and owner of Fernandez Financial Advisory in Los Alamitos, California, says both the health care and consumer staples sectors are examples of this.

The health-care sector includes biotech and pharmaceutical companies. The consumer staples sector includes food and beverages, household and personal products and even alcohol and tobacco.

These sectors typically don’t see the rapid growth that others — such as consumer discretionary (apparel, restaurants and luxury items) or information technology — might see in the rebound and recovery phase of a recession.

“In any downturn environment, we often look at consumer staples. And those are the usuals, the groceries we buy and the stores we buy them from,” says Fernandez. “Because no matter what, you’re buying toilet paper, eventually you’re going to go to the doctor, you’ve got to eat, you’ve got to drink.”

These stocks, considered “defensive stocks,” may not be as attractive during boom periods such as a bull market. But bear markets and recessions may be the time to reassess and consider the companies that sell items everyone buys, no matter the outside circumstances, Fernandez says.

Healthy large-cap stocks

If you’re interested in investing in individual stocks during a recession, you might consider options in the sectors outlined above. But that’s not the only criteria: Low debt, profitability, strong balance sheets and positive cash flow may all help a company get through difficult economic times.

“You’re going to look at the big guys that are going to get through this downturn and thrive and thrive,” Fernandez says.

So how do you identify those companies? One of the best places to start is to use a free stock screener. If you already have a brokerage account, this is most likely available on the broker’s website.

Here are some sample criteria you could put in your stock screener:

Set the market capitalization to “large cap” or larger. Large-cap stocks are shares of some of the largest companies in the U.S., generally with valuations of $10 billion or more. These companies tend to be more stable during volatility and have a lower risk of going out of business.

Set the price performance. This is how you’ll find individual stocks that have performed better than the market overall. First, you’ll need to determine the performance of a broad market index, such as the S&P 500, for a specified period. To find stocks that have performed better this year, set the price performance filter in your stock screener to show anything performing better than the S&P 500 over the last year.

Choose common stock. If you have the opportunity to filter for security type, select “common stock” to keep things simple.

Select the sector. Here’s where you can choose consumer staples,  health-care or other sectors.

This doesn’t mean the companies surfaced by a screener with these filters will always be strong in a recession. Remember that past performance doesn’t guarantee future results. But these are data points that might inform your eventual picks.

» Stocks for downturns: What are the closest things to recession-proof stocks?

Funds that track specific sectors

Investing in funds, such as exchange-traded funds and low-cost index funds, is often less risky than investing in individual stocks — something that might be especially attractive during a recession.

Investing in funds gives you exposure to specific baskets of securities, rather than just a single investment (such as an individual stock). In times of recession, this is one way to invest in several companies in the most resilient sectors while avoiding concentrating your risk in any one company or taking on more risk than you’re comfortable with.

If one company in the fund performs poorly, the strong performances of other companies can offset the losses of the underperformer.

“Most people aren’t stock pickers,” Fernandez says. “Most people are going to do better by buying an index of something and letting that index serve its purpose.”

» MORE: How passive investing works

Dividend-yield and fixed-income investments

Investors typically flock to dividend-yielding investments (such as dividend stocks) or fixed-income investments (such as bonds) during recessions because they offer routine cash payments.

Dividend stocks are shares of a company that splits a portion of its profit with all its shareholders based on the number of shares each investor owns. Investing in companies with a strong track record of paying — and increasing — dividends can provide stable cash flow even during recessions.

Another option is dividend ETFs, which are made up of companies known for routinely paying strong dividends.

There’s another factor that makes dividends more appealing during times of volatility, according to Marguerita Cheng, a CFP and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

“The benefit of investing in dividend-paying stocks, mutual funds or ETFs is that the dividends can be reinvested. Even if the value of your stock is down because of the conditions, the reinvested dividends lower the volatility,” Cheng explains. “Let’s say the stock market is down 10%, but that stock you have pays a dividend of 3%. If that gets reinvested, you don’t experience as much downside.”

When searching for dividend-paying stocks or dividend-paying ETFs, it’s important to note that yield shouldn’t be the determining factor, as the highest yields tend to come with additional risk. Rather, look for consistency in paying or increasing dividends, which is indicative of good corporate governance.

» MORE: Learn how to identify a stock market correction

Bonds (and many bond funds) are similar in that they make periodic payments over time, but the mechanics are different.

Bonds, whether issued by the U.S. government or a corporation, are essentially loans. You give a specific amount upfront to the company or government, and in return, you receive interest on that amount over a set period of time.

Plus, the borrower is obligated to pay you the face value of the bond when it matures (if you don’t sell the bond before it matures). In some cases, you might also choose to sell the bond to another investor on the secondary market before its maturity date.

» MORE: 4 ways to rebalance your portfolio

Above all, don’t panic during a recession

Recessions and volatile markets can be frightening times, but if you’re investing for the long term, what’s most important is to keep an even keel. In many cases, the best thing to do may be nothing at all — to trust the market’s resilience and the diversification you’ve built into your long-term portfolio.

Even severe economic downturns are usually followed by surprisingly fast recovery periods. After both the 2000 dot-com crash and the 2008 financial crisis, the S&P 500 took less than six years to reach new highs. After the 2020 COVID-19 crash, it took less than a year

» Don’t have a brokerage yet? See our picks for the best online brokerages

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