5 Safe Investments During a Recession
In order to build an investment portfolio that can withstand tough economic periods, investors should consider assets with certain characteristics. Safe investments tend to help preserve capital. They provide stability through their low volatility, diversification, and high quality. They also maintain a healthy level of risk.
During periods of economic recession, safer investments often outperform risky investments.
A recession is defined as a significant decline in economic activity. This is measured by gross domestic product (GDP), a measure of the total of all value that’s created in a country’s economy.
There are a number of factors to take into account to call a recession. But it is widely considered that an economy is in recession if there are two consecutive quarters of negative GDP growth. Recessions don’t last forever but they are marked by a period of decline that can last several months or longer.
Forward-looking investors must be prepared to safeguard their money during these unpredictable periods. To do so, they can hold on to certain investments that perform well during recessions. These investments should best serve investors who have a long-term trajectory in their investment perspective.
There are countless investment options to choose from in an economic downturn. Whether they are appropriate for you will depend on a variety of individual investor factors. So we put together a short list of securities as a starting point. Here are the top five safe investments to consider in a recession-proof portfolio.
1. Precious metals
Precious metals help diversify an investment portfolio, which can insulate your portfolio from market downturns.
Investing in precious metals like gold, silver, or platinum during a recession is a great way to diversify your portfolio. Precious metals are considered safe haven investments. This is particularly true during times of economic uncertainty.
During an economic downturn, certain assets may fluctuate in value. Some may appreciate while others could depreciate. And then there are some that can be very volatile, which can cause discomfort. But precious metals, especially gold, have steadily maintained and appreciated in value even during recessionary periods.
Taking a look at the performance of gold during times of economic downturns shows that it has had resilient performance. That’s because it offers stability while other assets may be volatile, and that is due to several reasons.
Gold is in high demand from investors on a global scale. Combine that with its scarcity and that results in an asset that increases in value over time. This is especially true during poor economic conditions because that’s when demand for precious metals increases.
Investors also like gold for its accessibility and liquidity. Precious metals can be quickly bought and sold in an open exchange. Gold and silver are the most traded precious metals on the market.
There are different forms in which investors can hold precious metals. These include buying physical gold or through mining stocks traded on a major exchange.
2. Dividend stocks
Investors might consider investing in dividend stocks during a recessionary period. These stocks provide a reliable source of income.
Dividend stocks pay out a portion of their earnings as dividends to stockholders. This provides a steady stream of income through dividend payments. Dividends tend to be paid on a quarterly basis or four times per year. This can come in handy during a recession when the market is volatile and there’s uncertainty of how other assets may perform.
Companies that offer dividends tend to be more stable in generating stable cash flow during uncertain economic times. A vast majority of companies that offer dividends are financially strong. They have a historical track record of performing well since they likely offer some kind of value through their products or services that are in demand regardless of the economic cycle.
Investors can reinvest those dividends to generate compounding growth over time. This will allow you to accumulate more shares. If the market is lower, you may be able to get the stocks at a discounted price.
3. Bonds
Bonds make it on the list as safe investments to own during a recession. They provide fixed interest payments to holders in regular intervals.
This income stream offers a form of financial stability during difficult economic times. These are periods when the performance of other assets like stocks can be unpredictable. Reliable income can also be a psychological cushion for investors who are uneasy when the market turns lower. Bond performance tends to be less impacted by volatility.
But bond prices are not immune to price swings. They can fluctuate when there’s changes in interest rates. However, these changes are less drastic than the changes that investors tend to see in the stock market.
When choosing bonds to invest in, investors should consider the credit quality of the bonds. Blue chip or high quality bonds like those issued by the U.S. government or financially sound companies are less vulnerable to default risk. In the event of slower economic activity or a recession, having assets with the highest credit quality matters.
4. Index funds
Index funds are a great way to provide investors with exposure to a wide range of assets across different market sectors. This diversification helps spread risk among different industries. In turn, that helps lessen the impact of negative performance in any single stock or sector. This is a fundamental investment strategy to reduce risk within your investment portfolio.
Historically, broad-based index funds that follow major indices like the S&P 500 offer an easy way to passively invest. Index fund investing tracks the broader market index. During recessions some sectors may perform worse than others while others may be more resilient. Since investors get vast exposure with index funds, this helps mitigate stock- or sector-specific risks.
5. Money market funds
Money market funds help preserve the value of the principal amount invested. This can be helpful in a recession where money invested in certain sectors may incur losses. During times of economic uncertainty investors prioritize preserving their capital over achieving outsized returns. Importantly, money market funds have low volatility. They invest in short-term, low-risk securities like Treasury bills and certificates of deposit.
These assets are known to have minimal price fluctuations. That makes the risk of significant losses rather low. Regulation of the money markets gives investors another layer of risk cushion. This asset type is regulated by the Securities and Exchange Commission which adds to its safety and stability.
Money market funds are a good option for when the economy is contracting. Yet their returns may lag behind when the economy eventually transitions to expansion mode. At that point, investors may want to reassess their allocation strategy.
Takeaway: Protect Your Wealth During Recessions
There is a considerable amount of uncertainty in the economy right now. The uncertainty trickles into the stock market during recessionary periods. That’s why investing during this time requires allocating funds to assets that can still offer steady returns even through economic challenges.
Precious metals, dividend stocks, bonds, index funds, and money market funds all provide balanced risk, high quality, and reliable ways to deliver returns. These safe assets can help continue your investment journey without skipping a beat.
Written by Paulina Likos
Read more about investing from the expert author:
7 Good Investments for Beginners
7 Best Safe Long-Term Investments
Best Safe Haven Assets to Protect Your Wealth
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Fortifying Your Financial Security: Why Precious Metals Are the Real Wealth Creator
6 Best Precious Metals to Invest In: Pros and Cons