Not that greed is behind a strategy of prudent investing for a goal like retirement, but Warren Buffett’s advice to “be greedy only when others are fearful” is sound: When the economy weakens or even goes into recession, it may feel especially risky to put money into the stock market, but downturns present opportunities to buy quality stocks at lower prices.
Many analysts now believe that with an expected Federal Reserve rate cut in September, and with the economy remaining strong, the U.S. may have dodged a recession.
However, markets and economies historically go through boom-and-bust cycles, which are normal, so it’s best to be mentally prepared for the next one.
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“Don’t stop saving for retirement. Markets go up and down a lot over long periods of time,” says David Peters, a certified financial planner and certified public accountant who’s the founder of Peters Financial Group in Richmond, Virginia.
Peters advises against trying to time the market. In a recession, that usually means panicking, cashing out investments and stopping contributions to investment accounts.
“Stay the course and continue to contribute,” Peters says. “Try to contribute at least enough to take full advantage of your employer match.”
Here’s a look at some investments that may hold up better than others during a recession:
— Traditional defensive sectors.
— Dividend-paying large-cap stocks.
— Government and top-rated corporate bonds.
— Treasury bonds.
— Gold.
— Real estate.
— Cash and cash equivalents.
Traditional Defensive Sectors
Defensive sectors such as consumer staples, utilities and health care tend to be less sensitive to economic downturns.
“During a recession, these sectors may perform relatively well as people continue to purchase essential goods and services regardless of the state of the economy,” says Michael Collins, a chartered financial analyst who’s founder of WinCap Financial in Winchester, Massachusetts.
“Companies in these sectors are also typically able to maintain stable revenues and profits due to the constant demand for their products or services,” Collins adds.
Dividend-Paying Large-Cap Stocks
Stocks of larger companies may perform better than smaller peers in an economic downturn.
“Large-cap stocks are generally considered less volatile than small-cap stocks and therefore may be more attractive during a recession,” says Collins. “In addition, companies that pay dividends tend to have stable cash flows and may be better positioned to weather a downturn.”
For investors who don’t want to get into the game of stock-picking, exchange-traded funds such as the Vanguard Dividend Appreciation ETF (ticker: VIG) offer exposure to large dividend payers.
However, Collins notes, if the recession is severe and leads to widespread market declines, even large-cap dividend-paying stocks may not be immune.
Government and Top-Rated Corporate Bonds
When stock prices fall, bond prices often remain stable or even increase. Bonds are less risky than stocks, and don’t generate the same kind of return, but can add stability and income to a portfolio.
That’s why many big investors tend to move away from stocks and into bonds during economic uncertainty or a market downturn.
Government bonds, especially those issued by stable, developed nations, are considered low-risk since they are backed by the government’s credit. Their fixed interest payments mean investors get a consistent return when stock prices are volatile.
Investment-grade bonds of financially stable companies may also be appealing in a downturn. High-quality corporate bonds generally offer higher yields than government bonds, although they carry more risk.
Treasury Bonds
Treasury bonds are long-term debt securities issued by the U.S. government. They have maturities of 20 to 30 years and pay a fixed interest rate semiannually.
Treasurys, says Collins, are similar to government and corporate bonds, as they are backed by the full faith and credit of the U.S. government. They are typically seen as safe investments during a recession.
“In times of market volatility, investors may flock toward Treasury bonds, seeking stability,” he says.
Gold
In a recession, investors frequently flock to gold, as it’s seen as a hedge against stock market volatility. While it frequently has a low correlation to stocks, the two asset classes do, at times, move in the same direction.
The performance of gold, like that of stocks, depends on numerous factors including market and economic conditions, interest rates and geopolitical events.
“Gold is often considered a safe-haven asset in times of economic uncertainty due to its perceived store of value,” Collins says. “During recessions, gold prices may rise as investors look for ways to protect their wealth from market volatility.”
It’s possible to own a hard asset such as gold bars, which can be included in a self-directed individual retirement account or simply stashed in a safe. However, many investors opt for the easier and generally safer route of buying stocks of gold miners or a gold ETF such as SPDR Gold Shares (GLD).
Real Estate
The real estate sector is often the poster child for “buy low, sell high.” In a recession, real estate may face significant challenges. Property values may drop due to factors such as reduced demand, higher unemployment and tighter mortgage lending standards.
However, certain segments, like rental properties, may remain stable or even perform well as more people rent instead of buying.
For investors who can stomach the idea of investing while the economic environment seems like nothing but doom and gloom, real estate may offer a promising opportunity. Like stocks, real estate values tend to increase over time, meaning investors who snap up properties at bargain-basement prices may see their investment grow significantly.
Investors who don’t want the hassles of owning brick-and-mortar buildings may choose to put their money into an ETF like the Schwab U.S. REIT ETF (SCHH).
Cash and Cash Equivalents
Selling all your stocks and hiding out in cash isn’t a good long-term strategy for growing wealth, but many investors like the feeling of protection that cash provides in a recession or market downturn.
Having some cash on hand is always a good idea, but it should be used strategically, rather than in a panic.
“If you are worried about the markets or you think you might need to withdraw money soon, you could potentially look to more liquid investments, like online savings accounts or money market funds,” Peters says. “These types of accounts are generally less volatile than stocks or bonds.”
The brokerage that holds custody of your IRA or taxable non-qualified accounts will offer money market funds. High-yield savings accounts, available at your local bank or online, can offer better interest rates than you’ll find in a regular savings account.
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7 Best Investments During a Recession originally appeared on usnews.com
Update 09/12/24: This story was previously published at an earlier date and has been updated with new information.
