7 Best Investments During a Recession: Financial Advisors Weigh In
As concerns about a potential recession mount, investors are increasingly looking to shield their portfolios from market volatility and economic downturns. Wall Street’s recent outlook reflects growing caution; Goldman Sachs has raised its recession probability to 30%, and BlackRock has warned that long-term U.S. Treasurys may no longer provide the reliable portfolio ballast they once did.
In this environment, financial advisors recommend a strategic review of investment holdings to balance risk and opportunity. Here are seven asset classes that tend to hold up well during recessions, helping investors preserve capital and potentially generate steady income.
1. Gold: A Timeless Safe Haven
Gold often serves as a go-to hedge when equity markets stumble. The SPDR Gold Shares ETF (GLD) has returned approximately 10.3% year-to-date, outperforming the broader S&P 500 which has seen a slight loss. This resilience is driven by several factors, including global central banks purchasing gold at record levels and ongoing geopolitical uncertainties.
Certified Financial Planner Jon Lapp explains, “Gold tends to hold up well in recessions because it’s not tied to corporate earnings or economic growth.” While gold’s recent price surge is notable, investors should be cautious about valuations potentially being inflated amid this rush to safety.
2. Short-Duration Treasurys: Stability and Liquidity
Short-duration U.S. Treasury securities, maturing within one month to two years, offer investors safety and liquidity without the significant interest rate risk that affects long-term bonds. Since these government-backed instruments mature quickly, they are less sensitive to rate hikes.
Trevor Gunter, CFP, notes, “Short-duration Treasurys often serve their purpose quietly during recessions by offering a reasonable return and preserving capital as investors wait out uncertainty.” Their near-zero credit risk makes them a dependable portfolio anchor during economic downturns.
3. Defensive Sector ETFs: Resilience Amid Downturns
Certain market sectors prove more resilient because their products and services remain in steady demand regardless of economic conditions. Utilities, consumer staples, and healthcare are classic defensive sectors that fit this profile.
Dan O’Rourke, CFP, highlights, “People still eat, take medicine, and use electricity even during recessions. ETFs focused on these sectors typically experience smaller declines, which can help investors avoid panic selling.”
4. Cash and Money Market Funds: Yield and Flexibility
High-yield cash and money market accounts have regained appeal, with rates near 4% offered by some online banks. This shift breaks the traditional notion that keeping cash is “dead money.”
O’Rourke adds, “Cash is no longer king, but it’s definitely not dead money anymore. It provides a low-risk, liquid option that can cushion portfolios against volatility while generating modest returns.”
5. Investment-Grade Corporate Bonds: Reliable Income
During recessions, the quality of bonds matters greatly. Investment-grade corporate bonds—those issued by financially sound companies—offer steadier income and lower default risk compared to high-yield or “junk” bonds.
Larry Adam, Chief Investment Officer at Raymond James, remains optimistic, stating, “We favor higher-quality bonds, including Treasurys, investment-grade corporates, and municipals, especially since yields are still attractive compared to historical averages.”
Lucas Fender advises caution, “Investors should steer clear of chasing higher yields in riskier bond sectors now; credit spreads tend to widen sharply when economies slow.”
6. Income-Producing Real Estate and REITs
Real estate investment trust (REIT) ETFs are showing relative strength so far this year. The Vanguard Real Estate Index Fund ETF (VNQ) has returned 6.2% year-to-date and offers a yield around 3.6%, outpacing the S&P 500’s yield of about 1.2%.
Lapp explains that persistent high home prices coupled with elevated mortgage rates keep many would-be buyers renting longer, maintaining strong rental demand even in a softening economy. This dynamic helps support regular income streams from real estate investments, which also offer some inflation protection.
7. Dividend Aristocrats™: Stability Through Dividends
(While the original summary is cut off before details are provided, Dividend Aristocrats™—companies with a long track record of consistently increasing dividends—are widely recognized as recession-resistant investments. They offer steady income and tend to be financially robust firms.)
Key Takeaways:
- Defensive assets like gold and real estate have outperformed stocks recently amid economic uncertainty.
- Short-duration Treasurys provide safety and liquidity without significant interest rate risk.
- Defensive sectors such as consumer staples, utilities, and healthcare generally fare better in downturns.
- Cash and money market funds are gaining renewed interest due to higher yields.
- High-quality bonds offer reliable income and lower risk, ideal for turbulent times.
- Income-producing real estate and REITs benefit from strong rental demand amid housing market challenges.
Investors should regularly review their portfolios with these considerations in mind, balancing risk while seeking out assets that historically provide stability during recessions.
For more detailed guidance, consulting a certified financial planner or advisor can help tailor investment strategies to individual risk tolerances and financial goals.