Investing > Investing During a Recession

Investing During a Recession

You can and should invest during a recession—but you need to do it properly to avoid disaster.

Reviewed by
Updated January 05, 2024

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Do you think investing in the middle of a recession is scary and stressful?

You’re absolutely right—recessions are absolutely horrible events that can potentially shatter lives, and they make investing in the stock market (something that isn’t easy, to begin with) even harder.

But, does that mean you shouldn’t invest during a recession?

No—that’s the worst decision that you could make. Although the market might be in a downturn, there’s money to be made—and not mobilizing your funds is a potential waste of an opportunity. So, how do you navigate the treacherous terrain of a very inhospitable investing climate?

You’re going to have to make adjustments—quite a lot of them, in fact. Speculative investments don’t do too well in recessions, so it is wise to take on assets that actually do well when the S&P is having a rainy day (or year). 🌧

Recessions have far-reaching consequences, so you have to be clear and upfront on one point from the get-go—recovery takes time. If you play your cards right, your investments will be profitable—but in the case of the last few big recessions, it took the market four years to return to pre-recession levels.

Of course, an ounce of prevention is worth a pound of cure—there are steps that you can take ahead of time to safeguard your investments should a recession happen. Proper diversification, exposure to different markets, and asset classes can help take the edge off the shock that recessions bring.

Although things are looking up and the markets might be growing at the moment, it’s a strange world—things could just as easily become worse. Some, for example, fear that some of the Fed’s ideas regarding inflation could trigger a full-blown recession. This stuff is important—it’s going to have a huge impact on your financial success and future—so let’s not waste any more time and get straight to it. 👇

What you’ll learn
  • What's a Recession?
  • How Different Assets Perform in a Recession
  • Stocks That Do Well in a Recession
  • Risks You Need to Know About
  • Investing in an Inflationary Recession
  • Investing in a Deflationary Recession
  • Rules to Keep in Mind
  • Is There a “Recession-Proof” Portfolio?
  • The Problems of 60/40 Portfolios
  • Conclusion
  • Investing in a Recession: FAQs
  • Get Started with a Stock Broker

What Exactly is a Recession? 🔎

We’re all familiar with what a recession is in simple terms—it’s when things go bad. But such a shallow understanding just won’t do—if you’re going to invest successfully in times of a recession, you need to know this stuff like the back of your hand.

Famed economist Julius Shiskin came up with a simple rule of thumb that explains what a recession is—two or more consecutive quarters with lowering gross domestic product. However, that too is a bit too simple for real-world scenarios.

The National Bureau of Economic Research (NBER) is the body that officially declares when a recession has happened in the United States. They define a recession as a noticeable decline in economic activity, spread across the economy, that lasts for more than a couple of months, and can be observed in terms of real GDP, employment, real income, wholesale and retail sales, and industrial production.

Now, that definition is a bit more flexible. While Shiskin’s definition might have been useful in the past, think about current events and the COVID-19 pandemic—the economy might be recovering slightly, but other metrics are not. So, at least in our view, the NBER’s definition is much more usable. According to the NBER, the recession began in February 2020, and it still isn’t over.

So, why are recessions important? They’re important because they spare no one—no matter what you invest in, or how you invest, a recession will throw a major spanner in your works, and if you don’t know what to do, you can easily lose a ton of money. And don’t fool yourself—you will most definitely experience not one, but plenty of recessions during your investing journey.

However, you can dull the edges of these catastrophic events, and you could even potentially profit from them—but that requires a fair bit of knowledge. We’ll do our best to give you the foundations and the basics in the rest of this guide.

How Different Assets Perform During a Recession 👩‍🏫

Recessions are bad news—that much is clear. They have a negative effect on the entire market and most asset classes will suffer when recessions occur. However, it isn’t quite so straightforward—with a little bit of know-how, you’ll be able to leverage most asset classes to preserve and grow your capital when recessions occur.

Stocks ✔️

Stocks begin dropping in price even before a recession begins. Although a vast majority of stocks will see a decrease in price, not all of those decreases are made equal. 

While speculative investments will likely lose a lot of value, core sectors such as healthcare, utilities, and consumer staples can either handle the recession much better or even see an increase in price.

If you’ve bought good, quality stocks that belong to healthy businesses, and if the fundamentals are there, you usually have nothing to worry about in the long run. Researching stocks pays off—if you’re confident in a company’s future, a recession might be a good time to buy their stock at a discount.

great market crashes in 2000
The great market crashes in 2000 and 2008. Image by TradingView.

To give you an idea of how badly recessions affect stocks, let’s take a look at some examples on the historical chart of the S&P 500. After the dot-com bubble in the early 2000s, the S&P 500 had three terrible years with sizable consecutive losses—a drop of -10.14% in 2000, -13.04% in 2001, and -23.37% in 2002. The stock market crash of 2008 is another good example—in 2008, the S&P 500 plunged by -38.49%.

Bonds ✔️

Bonds are considered a safe investment, so when a recession occurs, plenty of investors flock to them. Interest rates drop, and institutions like The Federal Reserve invest in treasury bonds—this leads to an increase in bond prices.

Although they are as close as we’ll ever get to a risk-free asset, the fact of the matter is that bond yields have steadily been dropping for a number of years. They aren’t currently at their historic lowest—but they’re not too far from it either. Bonds are safer than stocks, that much will always be true but they won’t make you a ton of money, especially if interest rates are low and inflation is going up.

So, what can we take away from that? Bonds do have a role to play in your recession portfolio—however, much of the age-old wisdom about asset allocation simply doesn’t hold true anymore. 

Although they are a handy source of cash, bonds don’t do well in a high-inflation environment—you can buy bonds, but try to incorporate other fixed-income or passive-income generating assets as well.

Gold ✔️

Gold has been a safe haven for investors for as long as investing has been a thing. Gold isn’t correlated with other asset classes—and because it is seen as a safe investment that can be used to preserve wealth, a lot more people buy gold in times of recession.

This, of course, leads to the price of gold increasing. Now, you could dedicate a part of your portfolio to gold before a recession occurs, then sell it at a profit—however, gold is much more useful as a method of diversification.

Gold prices skyrocketed
Gold prices skyrocketed after the 2008 recession and after the Covid-19 crash. Image by TradingView.

If you’re wondering how and where you’re going to store your hoard, don’t worry—there are plenty of ways to invest in gold without joining Smaug’s school of investing. These include shares in companies that mine gold, gold ETFs, and gold futures. You can, of course, invest in gold bullion, coins, or jewelry—but that is usually more trouble than it’s worth.

Funds ✔️

Funds come in a variety of shapes and sizes—well, not shapes and sizes exactly, but you get our point. The term funds covers a wide field of assets—but we’ll do our best to boil it down and offer some sensible advice here.

ETFs, seeing as how they are “baskets” of securities will most likely fare pretty bad during a recession—as the price of stocks will plummet. However, ETFs are likely to outperform most individual stocks seeing as how they are, by definition, diversified. 

And lest we forget, ETFs that focus on healthcare, consumer staples, telecommunications, or utilities can net you some pretty big returns during an event like the Covid-19 recession—so give sector funds some consideration.

You can also buy inverse ETFs—these are financial instruments that use derivatives to make money off of the drop in a particular index or benchmark. They can also be leveraged—but seeing as how inverse ETFs are already quite risky as is, we’d recommend extreme caution with them.

You can also use dividend funds to secure a base of passive income, large-cap funds to invest in companies that have the best odds of recovering from a recession, or even bond funds if you want to reduce the overall risk of your portfolio. 

The 6 types of ETFs
ETFs are very versatile due to how different each type is.

Index funds also offer you the chance to bet on the recovery of the market at large—and looking at historical data, that is always a good bet, although it might take a while for that to happen. All in all, funds offer an extreme amount of variety—and some of them will definitely find their place in your portfolio.

Real Estate ✔️

In times of recession, real estate prices drop—vacancies become more common, and rent usually drops as well. Seeing as how real estate is cheaper during a recession, it’s quite easy to deduce what’s the best play here—buy real estate at a low price, and if you can find a tenant, great. You’ve got some passive income, and if you can’t manage this, you can just sell for a profit at a later date.

Now let’s pump the brakes. Prices are rising, demand is rising, and supply is tight—the COVID-19 recession has had a completely unexpected effect on the real estate market. Mortgage rates were quite low at the time, so residential real estate did well—on the other hand, commercial real estate was in hot water, seeing as how lockdown measures have had a devastating effect on retail and brick-and-mortar businesses.

The crisis in commercial real estate might be a good buying opportunity—and if the current trend with residential real estate holds, residential real estate might be a good opportunity too, provided that you choose a property in a growing market with good long-term prospects. The only issue with both is that real estate requires a lot of capital to get into. However, there are other ways to invest in real estate other than buying a property. 

REITs ✔️

Real estate investment trusts (REITs) are companies that buy and operate real estate. They’re structured in a similar way to mutual funds—and they’re required to pay out at least 90% of their taxable income as dividends to shareholders. REITs differ from stocks by allowing you to gain exposure to the real estate market without investing a ton of capital, and they offer a nice source of passive income.

Not all REITs focus on the same types of property—some focus on residential real estate, others on commercial, and others on healthcare—and we’d take a closer look at healthcare REITs, seeing as how the sector fares well in recessions.

However, it’s not all roses with REITs—they often charge high upfront fees, are susceptible to rising interest rates, and the dividends that REITs pay out are taxed as regular income. However, if you find a good REIT, it might be a great way to gain exposure to real estate—keep in mind that the FED is planning on raising interest rates in 2023.

Cash ✔️

Cash is tricky in a recession—since interest rates will fall, this will have an effect on deposit accounts. The interest rates that you’ll be able to get with a savings account are abysmal—and sure, cash in a savings account is insulated from market risk, but it’s just going to lose value over time—lower inflation is still inflation.

Time in the market beats timing the market. Even in a riskier atmosphere such as a recession, the gains that can be made by investing your money are far greater than the amount you’ll earn in interest. The average returns of the stock market blow savings accounts out of the water—and if you can afford to stay invested, you’ll earn much more than by saving.

Having access to liquidity is always desirable—and in times of recession, you should always have a solid emergency fund—but as far as investing goes, we’d steer clear of hoarding cash.

Cryptocurrencies ✔️

Ah, cryptocurrency. Darling of the media, the subject of oh so many success stories (and just as many stories of failure), and possibly the future of currency. So, how does this asset class, a perennial topic of conversations worldwide fare in a recession?

Listen—we don’t know. We’re not sure. Although some correlations can be seen with other asset classes and the stock market at large, the fact of the matter is that we have way too little in the way of data to reliably gauge how cryptocurrencies will most likely behave in a recession. 

And the topic isn’t made any simpler by the fact that there is an incredible variety of cryptocurrencies—Bitcoin, Ripple, Dogecoin, Tether, and Ethereum have less in common than you might think.

Although huge strides have been made with regard to infrastructure, popularization, technology, and adoption, cryptocurrency is still in its infancy. The industry still has a long way to go yet, and it still needs to mature. None of us can say for certain exactly where in the wider financial ecosystem cryptocurrency will end up.

BTC, Gold, and the S&P 500 compared
Bitcoin dropped heavily during the Covic-19 crash but continued to grow much faster than gold and the S&P 500.

Unless you’ve been living under a rock, you’ve heard about the dramatic price drops of Bitcoin. Whether it’s due to Chinese crackdowns or Elon Musk’s antics (did we say market manipulation? We meant to say antics.), crypto currently lacks stability, and until it sees more widespread practical adoption, that isn’t going to change any time soon.

Listen, you could potentially make a lot of money trading crypto in a recession—but crypto is risky even when things are rolling smoothly. We really wouldn’t recommend putting a significant amount of money in crypto during a recession, unless you’re already a very seasoned crypto trader. This might be a downer, but we’re being honest.

Which Stocks Do Well in a Recession? 📈

During a recession, a huge majority of stocks will see a decrease in price. Although this can be a great opportunity to buy, that’s another topic—some stocks do in fact perform well in recessions, and finding them isn’t as much of a guessing game as you might think.

The topic of what stocks do well in times of economic crises can be illustrated quite well with real-life examples. When times are tough, luxury, travel, leisure services, and discretionary spending are headed for the chopping block—people have to save up money for the essentials.

Food, household products, and visits to the doctor, however, are non-negotiable. Therefore, focus on the sectors that will offer things that are still in demand during a recession—in no particular order, these are discount retail, healthcare, telecommunications, utilities, and consumer staples.

Chart comparing stocks that did well during the Covid-19 crash to the S&P 500
Some major retailers and healthcare stocks majorly outperformed the S&P 500 during the COVID-19 crash.

However, not all stocks in these sectors will do well—and not all of the stocks outside them will do bad either. When it comes to investing during a recession, metrics are important. Look for companies that are financially healthy—this allows them to weather the storm a bit more easily.

In particular, when deciding whether to invest in a stock during a recession or not, pay attention to their debt level, cash flow, and balance sheets. A company that has low levels of debt and a good cash flow will be able to ride out temporary volatility, and the likelihood that it will recover from the effects of a recession is much higher. 

On top of that, companies that exhibit these qualities also tend to recover much quicker—this, in turn, spurs on more investor confidence, and the stock price returns to a decent level quicker than the market at large does.

Risks of Investing During a Recession ⚠️

The single most apparent result of any recession is crystal-clear—stock prices plummet. Now, the obvious advantage here is that you can make a lot of money—invest in stocks that will recover when they’re cheap, and voila! However, it isn’t nearly as simple—and there are plenty of dangers associated with investing during a recession.

Timing the market is almost impossible—when a recession occurs, innumerable economic factors are at play. Don’t try to time the market, and don’t try to day trade your way to profits—such strategies rely on a lot of unseen factors behind the scenes functioning normally. With recessions, volatility and volume will go haywire, so anything other than long-term stock investing is inherently incredibly risky.

Small signs of recovery, be they in a sector or in a single stock don’t always pan out. No one is spared in a recession—every business that is listed in the stock market will feel the effects, and it’s very difficult to guess how most of them will fare. Because of this, hand-picking stocks— something that is already quite difficult—becomes a lot harder and riskier. Instead of that, consider investing in funds—whether they be ETFs, sector funds, mutual funds, or index funds.

Since timing the market during a crash is extremely difficult, building a recession-resistant portfolio is a more reliable option.

Recessions have the potential to last for a long time. The fact that you can now comfortably set aside some amount of money for investing each month doesn’t mean that you’ll be able to do so in a recession. Don’t overextend yourself—in an environment where wages stagnate or drop, job security is imperiled, and inflation and interest rates are always an issue, the biggest mistake that you can make is to risk too much money.

Investing in an Inflationary Recession 🐡

Although it poses risks, inflation can actually benefit businesses. In an inflationary recession, stocks can easily get swept up by the tide and see increased prices. Inflation makes it easier to pay off debts, allowing businesses to expand more easily. If you know how to recognize an undervalued stock, then inflationary periods can be quite profitable for you.

Of course, inflation isn’t a positive effect on the whole. Using inflation to your advantage is great—but the fact that certain stocks will do well because of inflation doesn’t mean that your portfolio is ready to bear the brunt of this phenomenon.

When it comes to bonds, consider investing in Treasury Inflation-Protected Securities (TIPS). These are treasury bonds that are indexed to inflation—meaning that if inflation goes up, so too does the interest rate that is paid. During periods of inflation, you should avoid long-term bonds.

We’ve already mentioned this, but consider allocating a part of your portfolio to precious metals. Gold and silver are tried-and-tested hedges against inflation. Real estate allows you to generate passive income, and with inflation, the property value will only rise—and while we’re on the topic of passive income, you should also consider dividend-paying stocks.

Certain sectors have shown great performance during periods of inflation, including the energy sector, the materials sector, financials, and equity REITs. With a certain amount of your portfolio devoted to making use of inflation and another devoted to protecting your investments against inflation, you can actually profit during a recession.

💡 Looking for ways to protect your portfolio? Learn how to hedge against inflation.

Investing in a Deflationary Recession ⭐️

In a deflationary recession, stocks are the last thing you should invest in. Now, that doesn’t mean that you should disregard them entirely—but confine a fair amount of your investments to defensive sectors such as utilities, agriculture, and health care. Avoid real estate—both commercial and residential, as well as REITs, and highly-leveraged companies.

Whether you’re buying defensive stocks or not, focus on companies with significant cash reserves. This will allow those companies to expand business much easier and will give them a sizable headstart once deflation ends.

Graph of inflation rates in the U.S. over the past century.
Historically, the USD has been under almost constant inflation, the only recent deflationary period being after the Great Recession.

Long-term bonds, zero-coupon bond funds, and dividend funds should also be considered, as well as corporate bond and municipal bond mutual funds. Cash is king when deflation reigns—so any source of passive income is a good choice. 

Pay off any debts you have as soon as you can—preferably before deflation picks up pace. Savings accounts also aren’t as bad of a choice as they usually are—and certificates of deposit can also be a great choice, provided that you pick ones that have short to medium terms.

Keep cash on hand—unlike in normal circumstances, idle cash isn’t wasted during periods of deflation. Depending on the state of the market, you can also consider investing in cryptocurrency, or perhaps an inverse ETF that mirrors the S&P 500 or the Dow Jones industrial average.

Rules for Investing During a Recession 📝

We’ve explained plenty about how a recession works and how asset classes typically perform in recessions. Now, let’s take all of that information and boil it down to some down-to-earth, actionable advice.

Use Dollar-Cost Averaging ➗

Many newer investors don’t realize that dollar-cost averaging is a great way to combat volatility. On top of that, it is incredibly simple. Just invest the same amount of money into a stock or other securities at regular intervals. When prices are lower, you’ll be able to buy more—when they are high, you’ll be able to buy less.

Dollar-cost averaging isn’t likely to bring your enormous returns, but it is a great risk-management strategy, and it takes timing and emotion out of the equation of investing—making it a great tool for recessions.

Rebalance and Diversify ⚖️

In a recession, proper diversification is key. You want your assets to be spread across different sectors, asset classes, and you might want to look at geographic diversification as well.

Diversification follows the age-old wisdom of not putting all your eggs in one basket. It’s the alpha-and-omega as far as risk management is concerned, and in the risky environment of a recession, it is paramount that you diversify properly.

Once you do, you’re going to want to stick to your desired allocation. Think of rebalancing as maintenance work on your diversification—with a few touch-ups here and there, your portfolio won’t go off course.

Don’t Forget the Fundamentals ⭐️

A company’s fundamentals must be considered before you make the final decision to invest, whether or not a recession is currently happening. However, fundamental analysis is all the more important during a recession.

Having a thorough, detailed overview of a business’s financial health is key to successfully investing in a recession. Cash flow, debt levels, price-to-earnings ratios, and earnings per share are just some of the metrics that you’re going to have to factor in.

Taking the time to study a company’s fundamentals is imperative to the success of investing in any environment.

Consider Dividend Stocks 💰 📅

Job security is at risk in any recession—even if you are in a field that is currently in demand, there are no guarantees. In times of recession, sources of passive income can help you bear the brunt of the worsening economy a bit easier. If you haven’t already done so, consider investing in dividend stocks.

Keep a Cool Head 🥶

Recessions are horrible. Even if your portfolio wasn’t going to take a big hit, recessions are still life-shattering events. People lose jobs, businesses close, and a lot of suffering comes out of the woodwork.

You, your friends, your family, and your loved ones will all most likely be in a position of uncertainty, and you’ll be worried for good reason. And let’s just make it perfectly clear—your portfolio is most likely going to see a big hit.

All of this makes it all the more important to keep a cool head. We know that it’s impossible to stay completely stoic in the midst of such events, and we’re not expecting shatterproof discipline from you. However, the lessons of market psychology apply more than they ever do in times of recession.

Don’t let fear paralyze you, don’t let greed make you take chances that you shouldn’t, and don’t get discouraged. We know from past recessions that there is a light at the end of the tunnel—try to reach it with as few bumps as possible—panic-selling when prices crash is a big no-no.

If Your Strategy Isn’t Broke—Don’t Fix It 🩹

Recessions have unfathomably large effects and repercussions on the economy. This can easily lead you to believe that you need to throw everything that you’ve done up to this point to the wind—but that isn’t the case.

If your investment strategies work, there’s no need to go back to the drawing board. Sure, when a recession hits, everything needs to be reviewed, perhaps tweaked a little—but if the evidence is there, have a little faith in the ways that have already brought you success.

Look at Profitable Companies 📈

One of the most reliable ways to tell if a company is going to perform well during and after a recession is to see if they are profitable. When times are good, companies can operate at a loss for years on end and still do good business—but when a recession hits, that luxury vanishes quickly.

If a company is operating at a profit during a recession, shows strong fundamentals, and can fit into your desired level of diversification and specific asset allocation, it deserves a closer look—you might have stumbled on to a winner.

Consider Real Estate and Precious Metals 🏘 🥇

Precious metals are a well-known safe haven for when a recession hits. Gold and silver perform well when the economy is in a crisis, but the increased demand often drives up prices. If you think a recession is in the works, consider allocating a certain percentage of your investments to gold before prices jump.

Real estate is a bit trickier. Although it can serve as a nice source of passive income, recessions typically see a decrease in the demand for real estate. However, if you’ve got the capital, this could be a good play for the long-term—as real estate prices will be much more affordable in a recession. You should also consider using a real estate crowdfunding site if capital is an issue.

Don’t Forget—or Dip into Your Emergency Fund 🚑

Recessions always have an effect on the job market. Although you might be perfectly comfortable in your position right now, barely anyone of us can claim to have absolute job security.

Emergency funds are personal finance 101. This is something that you should practice anyways, but let’s mention it again here, because it is all the more important during a recession—always, always have at least 3 to 6 months of expenses tucked away in an emergency fund.

That fund is off-limits. Under no circumstances are you allowed to dip into it. It is separate from your savings—the purpose of an emergency fund is to cover your living expenses in case of job loss or an injury that doesn’t allow you to work.

Don’t Try to Time the Market ⏳

We all know that a recession causes asset prices to drop. We also know that they eventually recover. This leads a lot of people to a very simple thought—wait until everything drops as much as possible, then buy it, and sell it later when prices recover. Simple, right?

Well, no—not really. Timing the market is incredibly hard, and as a retail investor, you simply don’t have the tools to even attempt that at your disposal. No big bets, no risky plays, no YOLOING your life savings (sorry WSB, we still love you).

Keep the Long Term in Mind 🗓

Recessions aren’t a simple race to the bottom—there are short periods where things start looking up, and rarely anything will see a continuous decrease in price throughout the entire recession.

Don’t let short-term changes fool you. A couple of bad weeks or a couple of good weeks mean nothing in a recession. If you’re invested and a recession is occurring, you’re in it for the long haul—so act like it.

Avoid Margin and Leverage 🎯

Trading with leverage or margin trading is a practice that can help experienced traders multiply their returns. It is suited to short-term trading, and it requires a lot of experience to pull off properly.

You don’t want to trade in the short-term during a recession. You also don’t want to pile on any added risk in an environment where job security, inflation, and other factors are potentially problematic.

Avoid the unnecessary risks of margin trading and leverage during a recession. These risky approaches are good for experienced traders that want to maximize their returns—in a recession, your goal should be to ensure your financial security and stability—and trading on margin isn’t the way to go about achieving that.

Don’t Overlook Blue-Chip Stocks 🔵

Big companies are much more likely to have healthy cash flows, reserves, and appropriate levels of debt. Most blue-chip stocks belong to well-established companies, household names such as Apple, Coca-Cola, Disney, McDonald’s, and Walmart.

Now, blue-chip stocks aren’t immune to recessions, and they’re not too big to fail. But they are much less likely to fail and much more likely to recover. Think about it this way—we’d really have to experience an apocalyptic event for Walmart, Coke, and Mickey D’s to go out of business.

Blue-chip Stocks
Popular blue-chip companies recovering after the Covid-19 crash. Image by TradingView.

The price of blue-chip stocks drops during a recession. Seeing as how they are expensive, a recession might be a good time to buy them at a discount, because they are the stocks most likely to recover.

Invest in Funds ✅

Funds allow you to gain broader market exposure much more easily than hand-picking stocks. And even if your stock researching chops are up to par, thoroughly and meticulously researching each stock is painstaking and time-consuming.

ETFs, mutual funds, and index funds have a role to play in constructing a portfolio for a recession. They allow you to easily invest in entire sectors and also prevent you from being overinvested into a single business.

Know What to Invest in as the Recession is Coming to an End 🔚

It can be tough to gauge when a recession is coming to an end—but with a little more education and an ear that is planted firmly to the ground, along with a focus on absorbing and properly interpreting the news, you’ll be able to tell when a recession is winding down.

Just as some stocks perform well during a recession, others show fantastic growth in the recovery period. These stocks are usually found in a couple of sectors: consumer cyclical companies, growth stocks, and small-cap stocks.

Is There a “Recession-Proof” Portfolio? 🤔

Let’s tackle the issue head-on—there is no such thing as a truly recession-proof portfolio. Every single portfolio that could ever be constructed will feel the effect of a recession. However, that doesn’t mean that there aren’t portfolios that are more, let’s say, recession-resistant.

Proper diversification, thorough research of what you’re investing in, sticking to a sensible asset allocation, and rebalancing are key factors that help any portfolio weather the effects of a recession a bit more steadily.

Professional investors have been trying to construct portfolios that will either completely resist a recession or even thrive in one for years now.  Whether or not they’ve succeeded is still up for debate—the results are definitely promising, but with only a couple of recessions to test their theories, we can’t be certain. Still, it’s only fair that we mention the two “recession-proof” portfolios that stand out the most.

Ray Dalio’s All-Weather Portfolio ☔️

Ray Dalio is the co-chief investment officer of the world’s largest hedge fund, Bridgewater Associates. Unsurprisingly, he’s also a billionaire—as he is a very respected figure in the world of investing, some think of him as Scrooge McDuck who wears pants.

In 1996, Dalio came up with a portfolio that was designed to weather all economic cycles. In the simplest terms, the asset allocation of an All-Weather Portfolio is as follows:

  • 40% Long-term Bonds
  • 30% U.S. Stocks
  • 15% Intermediate-term Bonds
  • 7.5% diversified commodities
  • 7.5% gold
All-Weather Portfolio
Chart representing the asset allocation of an All-Weather Portfolio.

The all-weather portfolio has around half the volatility of the S&P 500—however, it is a conservative portfolio with a big chunk of it devoted to bonds. It will perform much better than most portfolios in a recession—but when things are going well, it won’t outperform the average returns of the stock market.

If your risk tolerance is low, or if you simply feel that a recession is looming and that you need to preserve the capital that you’ve accumulated, take a closer look at Dalio’s All-Weather portfolio. For younger investors, it will most likely be far too conservative, as they have time to recoup losses and should aim for a portfolio with a higher allocation of stocks.

Just so that we’re clear—whether or not this portfolio will work for you depends on a ton of stuff—your savings, your goals, your risk tolerance, and your overall financial wellbeing. We’re not endorsing this portfolio (nor the other one that we’ll cover below), because we simply can’t guarantee that it will work for you. But take a close, thorough look at it yourself, because it just might. We’re simply here to let you know that it exists.

Chris Cole’s Dragon Portfolio 🐉

Chris Cole, the CIO of Artemis Capital designed a portfolio that would show consistent growth in every economic cycle. His Dragon portfolio seeks to accomplish the same thing as Ray Dalio’s All-weather portfolio, but with a different asset allocation.

The asset allocation of a Dragon portfolio is as follows:

  • 24% stocks
  • 21% long volatility assets
  • 19% gold
  • 18% bonds
  • 18% commodity trends
Chart representing the Dragon Portfolio’s asset allocation.

The large allocation of bonds and gold serve as a very strong safety net for your portfolio—the 24% stock allocation is up to you, but 21% of the should be actively traded.

Commodity trend stocks are a term that you might not have run into before. In essence, a commodity trend is a commodity that has become popular as of late—these are investments that should pay off in the short or mid term, and they require active monitoring and maintenance. This does, however, make the entire process of maintaining such a portfolio more difficult.

Building a dragon portfolio isn’t the easiest task—however, it has shown good performance in both growing markets and shrinking markets, and is quite diversified. To reiterate, we don’t know if this is the thing for you, but give it a closer look because it could be—and a lot of thought went into coming up with such a portfolio.

The Problems of Using a 60/40 Portfolio in a Recession 🚨

The 60/40 portfolio is the brainchild of Harry Markowitz—a Nobel-prize-winning economist that pioneered Modern Portfolio Theory and concepts like the efficient portfolio frontier. Markowitz’s work suggested that a 60/40 portfolio would be optimal for most people looking to retire, and would allow retirees to withdraw 4% annually without actually impacting the growth of their portfolio.

Well, that worked out splendidly—for a while. The problem with the perennial 60/40 portfolio is the same problem that MPT in general has—correlations aren’t fixed, and past data does not indicate future performance.

To give the most obvious example, bond yields have gone to historic lows—and in a portfolio with just two asset classes, that is an unsolvable issue. On top of that, we’re seeing the strongest positive correlation in a century between equities and bonds—and with an investment strategy that depends on there being a negative correlation between these two asset classes, it’s obvious that the 60/40 approach is in hot water.

So, does that mean that you should discard bonds entirely? Not at all—bonds still have a role to play in your portfolio, but 40% is way too high of an allocation because of their sluggish returns. If you were to allocate 40% to bonds today, the stock part of your portfolio would have to perform really well just for you to get average market returns.

The fact of the matter is, the 60/40 portfolio is an old concept. It’s generic, doesn’t take into account the specifics of your financial state or your goals, and was constructed in a world that no longer exists. There are no one-size-fits-all solutions—and that’s exactly what the 60/40 portfolio tries to accomplish. Credit where credit is due—but it’s time to let the 60/40 enjoy a peaceful retirement.

Conclusion 🏁

If you’ve made it this far—congratulations! Take a breather—thinking this much about recessions isn’t the most stress-free activity. You deserve to relax a bit after all of this talk about doom-and-gloom.

Stressful as it might be, knowing how recessions work is fundamental—this knowledge allows you to not only survive, but thrive during economic downturns when most people will be scrambling not to lose it all. Keep a cool head, and make some preparations sooner rather than later—and if you have a solid game plan for when things go bad, you’ll do just fine.

Investing in a Recession: FAQs

  • What Caused the Great Recession?

    The great recession was caused by the subprime mortgage crisis, a massive spike in trading risky derivatives, and financial deregulation.

  • What Happens During a Recession?

    During a recession, gross domestic product drops, unemployment rises, wages and incomes are lowered, and economic activity is reduced overall.

  • What Happens to Your Money in the Bank During a Recession?

    As inflation is likely to rise during a recession, the value of the money that you’ve put in a bank is going to be reduced. Putting money in a savings account can rarely beat inflation even without the added burden of a recession, so we’d recommend investing in either case.

  • Who Benefits from a Recession?

    When a recession hits, inflation usually drops—this allows businesses in debt to pay off their debts much easier and is beneficial for those who rely on fixed incomes.

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