Where to Invest During a Recession: 5 Do’s and 4 Don’ts

Hearing talk about a recession is enough to make anyone feel jittery. Recessions can affect you financially in big and small ways, and recovery may take months or even years.

When times get tough, a good defense is the best offense. Leaning into investing during a recession may seem counterintuitive if you want to protect your assets, but there are some good reasons to keep one foot in the market.

Read on to learn where to invest during a recession and what investments you may want to avoid.

What is a recession?

The National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” In other words, the economy slows down.

Recessions are a natural part of the economic cycle; periods of growth are typically followed by periods of decline. There have been 34 recessions in U.S. history, with the most recent one occurring in 2020.

What causes recessions? Each one is different, but common causes include:

• Unexpected shortages of materials needed to produce consumer goods
• Housing market crashes
• Serious disruption in the financial markets
• Poorly managed monetary policy

No one can say exactly when a recession will begin or end. What you can do is learn how to insulate yourself against the worst financial impacts when the economy shrinks.

Benefits of investing during a recession

When a recession hits, it’s tempting to circle the wagons and pull all your money out of the market. If you’re not invested, you’re not taking any risk, right? While that’s true, you could be missing out on potential growth.

Staying invested during a recession offers an opportunity to:

• Buy low. Stock prices can drop in a recession, allowing you to buy shares at a discount. That can lead to big gains later when prices recover.
• Buy winners. Some investments shine in a recession and outperform, even when the market is down. Holding these investments can add some stability to your portfolio while prices fluctuate.
• Dollar-cost average. Dollar-cost averaging means you keep feeding the same amount of money into the market, whether it’s high or low. When prices are down, you can get more of the same stock without changing the dollar amount you invest.

A recession is also a good time to rebalance. Rebalancing means buying or selling investments so that your asset allocation matches your goals and risk tolerance.

5 investments to consider for a recession

How you invest in a recession should reflect the level of risk you’re comfortable taking. Talking to a financial advisor can help you figure out a strategy that’s right for you. That strategy may include these investments.

1. Defensive stocks

Defensive stocks are stocks that tend to do well in any economic environment. They can also be called non-cyclical stocks, since they don’t move with the economic cycle.

What makes a stock defensive? It represents a sector of the market that isn’t likely to see any huge drops in spending—think consumer staples, healthcare, and utilities.

Examples of defensive stocks include:

• Johnson & Johnson (NYSE: JNJ)
• Pfizer (NYSE: PFE)
• Procter & Gamble (NYSE: PG)
• Walmart (NYSE: WMT)
• Costco (NASDAQ: COST)
• Duke Energy (NYSE: DUK)
• Coca-Cola (NYSE: KO)

These types of stocks are usually less volatile in a recession and may provide stable growth over the long term.

2. Dividend stocks

Dividend stocks pay out part of their profits to their shareholders. Owning dividend stocks in a recession could generate some steady, stable income if you have the right ones in your portfolio.

That means companies that have a history of increasing dividend payouts year over year, even through economic downturns. Market pros know them as dividend aristocrats and dividend kings. Dividend aristocrats have raised dividends for 25+ consecutive years; dividend kings have done so for 50+ years.

Examples of both include:

• Chevron (NYSE: CVX)
• Walmart (NYSE: WMT)
• PepsiCo (NASDAQ: PEP)
• Hormel Foods (NYSE: HRL)
• Colgate-Palmolive (NYSE: CL)

Many of the top dividend stocks are also defensive stocks, helping you insulate your portfolio against a recession even further.

3. Real estate

Real estate can be a good investment during a recession since people still need a place to live, no matter what’s happening with the economy. If you don’t have the cash to buy an investment property, you’ve got other options.

• Real estate investment trusts (REITs). A REIT is a company that owns and operates real estate. REITs pay the profits they make from those properties to their investors.
• Real estate exchange-traded funds (ETFs). Real estate ETFs hold a collection of investments, which can include real estate stocks and REITs.
• Real estate stocks. Real estate stocks represent companies that operate in the real estate space.

The best real estate investments for a recession are ones that are unlikely to see big shifts in demand. For example, a REIT that owns assisted living facilities or multi-family apartment buildings could be a safe bet.

4. Gold

Gold can be a hedge against recessions and help you head off some of the impacts of inflation. Investors like gold because it can hold its value well, even if the U.S. dollar gets shaky.

Storing gold bars in your spare bedroom probably isn’t realistic, but you could still get in on precious metals with gold stocks or gold ETFs. Examples of gold stocks and ETFs include:

• New Gold Inc. (NYSE: NGD)
• Kinross Gold Corp. (NYSE: KGC)
• SSR Mining Inc. (NASDAQ: SSRM)
• SPDR Gold Shares (NYSEARCA: GLD)
• iShares Gold Trust (NYSEARCA: IAU)

You might want to talk to an advisor about how much to invest in gold during a recession. A good rule of thumb is to limit your exposure to alternative investments to 10% or less of your portfolio.

5. High-yield savings accounts

It never hurts to have some cash in the bank, especially during a recession. If you lose your job or are temporarily laid off, your emergency fund can help you survive until a steady paycheck starts rolling in again.

Savings accounts are virtually zero-risk, since your money is in a bank and not the market. You may not get the same rate of return compared to stocks, real estate, or gold, but you don’t have to worry about losing money either.

Check savings account rates at your current bank to see how they compare elsewhere. Some of the best savings accounts are found at online banks, which offer a solid combination of high rates and low fees.

While a recession can be an unsettling time, it also presents valuable opportunities. One of the first steps is to focus on building cash reserves, which can be done strategically through tax-loss harvesting—using investment losses to offset capital gains and potentially reduce your tax bill.

It’s also important to stay committed to your financial plan and avoid making emotionally driven decisions. If you’re feeling uncertain, speaking with a financial advisor, planner, or even a trusted friend or family member can help you regain perspective and confidence.

And, if market volatility is keeping you up at night, it may be time to reassess your risk tolerance and time horizon to determine whether any adjustments are needed to keep your strategy aligned with your comfort level and goals.  

4 investments to avoid in a recession

What should you not invest in during a recession? In general, you want to avoid anything that’s high-risk or has a reputation for underperforming when the economy declines. And you may want to skip out on anything that just doesn’t feel right for you.

Some of the investments we caution against in a recession include:

• Discretionary/cyclical stocks. Discretionary stocks are things people don’t need to spend money on to live. In a recession, people cut back on things like travel and shopping, so hotel stocks, airline stocks, and retail stocks could all take a hit.
• Emerging markets. Emerging markets can hold promise, but they’re also more vulnerable in a recession. International stocks and bonds may feel deeper impacts from a downturn than U.S. stocks and bonds.
• Bonds. Bonds can be hit or miss in a recession, depending on the type of bond and how yields are moving. Government bonds may provide stability, but pay out lower interest rates. Junk bonds, meanwhile, could pay more but require you to take on more risk.
• Speculative investments. A speculative investment is anything that requires you to make a “best guess” about how it will perform. Options, futures, and cryptocurrency are all high-risk, speculative investments that you may not want to touch while the economic outlook is uncertain.

My primary tip for keeping yourself financially secure during a recession is to build up cash reserves well before the recession hits, allowing you to avoid tapping into your investment accounts except for strategic reasons. Additionally, having a solid financial plan in place helps you avoid making emotional decisions during market downturns.  

Don’t count out investing during a recession

Recessions can bring uncertainty, but the best thing you can do is keep a level head. Ask yourself how comfortable you are with investing during a recession first, then consider which investments make the most sense based on your goals and risk tolerance.

Remember, recessions do end eventually. The right plan can help you recession-proof your portfolio and continue building wealth with less stress.

FAQ

Is cash a good investment in a recession?

While cash isn’t technically an investment, it can be a smart financial move during a recession. Keeping money in cash or cash equivalents—such as high-yield savings accounts, money market funds, or short-term Treasurys—offers stability, quick access in an emergency, and flexibility to seize opportunities when markets dip.

However, cash generally doesn’t grow much over time and may lose purchasing power to inflation. That’s why it’s best used as a recession buffer rather than a long-term wealth-building tool.

How long do recessions last?

On average, U.S. recessions since World War II have lasted around 10 to 11 months. Some are brief, like the COVID-19 recession in 2020, which ended after just two months, while others drag on longer, such as the 18-month Great Recession from 2007 to 2009.

Even after a recession technically ends, the economy may take months or years to fully recover. The National Bureau of Economic Research (NBER) officially determines when recessions start and stop, based on broad economic indicators.

Should I save or pay down debt in a recession?

That depends on your personal finances, but generally, building savings takes priority, especially if you don’t have at least three to six months of living expenses set aside or are worried about losing income. Cash reserves can help you weather a layoff or emergency without relying on credit.

Once you have a solid emergency fund, it’s smart to focus on paying off high-interest debt, like credit cards. Many people benefit from a balanced approach: Maintain minimum payments while building savings, and then shift to more aggressive debt payoff once your financial cushion is in place.

What assets hold the most value in a recession?

During recessions, certain assets tend to retain or even increase in value. These include cash and cash equivalents, U.S. Treasury bonds, and precious metals like gold, which are often viewed as safe havens. Defensive stocks—such as those in utilities, healthcare, and consumer staples—can also perform relatively well, since demand for their products stays consistent.

Dividend-paying stocks may offer an additional buffer by generating reliable income, even if share prices fall. A diversified mix of these assets can help protect your portfolio from deeper losses in a downturn.