$1.9B Omaha private bank team joins Private Wealth. Meet the team here →

private wealth

Investment Strategies for a Forecasted Recession

best investments during a recession

As we move further into 2023, predictions of an imminent recession continue to grow stronger. There are many atmospheric conditions that we are keeping an eye on: 

  • higher interest rates,
  • stormy market activity,
  • turbulence in the banking sector, and
  • a high-pressure system of inflation unlikely to move out anytime soon.

Many forecasters are already upgrading the recession watch to a full-blown warning. 

And while these headwinds will cause some people to sell stocks in a panic, it’s important to remember that a recession can present different opportunities to benefit your portfolio. With some due diligence and the guidance of your professional advisor, you can manage your investments to take advantage of a market downturn and weather the storm. 

Is It Wise to Invest During a Recession?

The idea of safe investing means different things to different investors. There is no such thing as a 100% safe investment. If you want your capital to grow, there is always some inherent risk of principal. 

With that being said, it is suitable to invest during a recession. There are investment strategies that can be beneficial in times like these. It’s important to work closely with your advisor to talk about what your cash needs are now and what they will be in the near future. Then, investments can be researched and selected based on your individual risk tolerance as well as your immediate and long-term needs and priorities. 

What Investment Opportunities Exist in a Recession?

During a recession, we look to strong companies with healthy balance sheets. People generally spend less money during a recession, and economic activity slows down. So, it’s important to lean into companies that don’t have too much debt compared to their assets. We want to see strong cash flows that are expected to continue or even grow.

There are also certain industries that, regardless of economic conditions, just don’t experience remarkable performance swings one way or the other. This makes them more attractive during economic downturns. For instance, products and services that people need to buy no matter what always remain in demand and, therefore, make more stable investments. These are often referred to as “defensive stocks” or “defensive investments” because they can be used to protect portfolios from losses. Examples of industries that are generally considered lower risk in a recession include:

  • consumer staples,
  • health care, and 
  • utilities. 

What Investments Pose More Risk in a Recession?

When we’re balancing the diversity of a portfolio, there will always be some portion where we are comfortable dialing up the risk a little bit. To avoid too much volatility during a market downturn, we will try to stear clear of companies that have recently taken on a lot of debt or that don’t have healthy cash flows. 

Investments or industries that tend to see more volatility in a recession include growth stocks or companies that depend on consumer discretionary income, such as: 

  • tech
  • consumer discretionary

While industry or sector is a strong determinant of performance, company-specific features can make up for a sector’s weakness. There are still strong companies within these industries that should be considered. 

Seek Shelter in Investments Outside the Stock Market

For much of the past decade, most investors favored stocks over alterative options such as fixed-income investments. After all, it didn’t make sense to put money into anything that wasn’t going to yield as much as equities.

In a recession environment, however, certain alternative investments regain popularity for their more modest but stable returns. 

Fixed-Income Investments: 

Fixed-income investments provide an investor with a predictable payment stream over the course of the investment term and can offer steady returns with lower risk than other types of investments. 

Investors and advisors have recently been more excited about bonds, for instance, which are experiencing favorable yields. Plus, these are typically considered to be lower risk during a recession because companies must usually pay their fixed-income debt before their equity stakeholders. 

Real Assets:

Markets are cyclical, and it’s impossible to know right now what this cycle will look like. But, it already has its own unique characteristics with incredibly high inflation. This makes it all the wiser to have a diversified portfolio with some exposure to real assets that typically generate stable returns. This can include real estate, commodities and natural resources.

Keep Calm. Even Stock Market Storms Pass.

  1. Remember that markets are forward-looking. Much of the economic data in the news signifying we may be in a recession are lagging indicators. GDP, unemployment and inflation are all figures measuring a historical period that has already happened. The job of the stock market is to look to the future to see how companies may perform going forward. Often, when economic data is posted that confirms we were in a difficult economic environment, the recession is coming to an end or has already ended, which creates a potential buying opportunity.

  2. Stick to the plan and avoid emotional biases. As a long-term investor, your investment strategy was built based on your unique financial goals and risk tolerance. Times like these present good opportunities to revisit those goals and consider slight adjustments that can work with your priorities. The old adage “buy low, sell high” is best practice for a reason. It’s normal to feel some amount of concern in times like these, but resist regretful responses like selling when markets are low. 

  3. Diversify your liquidity sources. When markets are down for fears of a recession, it’s prudent to have other sources of liquidity to avoid selling into a down market to cover any near-term needs. With access to cash, you are better prepared for unexpected expenses or attractive investment opportunities that may arise. 

While a recession is not ideal, what went up, must come down—and will eventually go back up again. Talk to your advisor today about how to manage your investment risks based on today’s market trends.

This presentation is offered for informational purposes only and should not be construed as an offer of personal investment advice. It does not account for your specific objectives, situation or needs, and no binding obligation to enter into any transaction with you is to be implied. Please note that PW or its Investment Adviser Representative(s) may trade for their own accounts and consequently, be invested on the opposite side of the market from your order(s) or have long or short positions in the securities referenced.

Investing involves risk, including loss of investment principal. Using a specific strategy or investment advice does not assure earning a profit or avoiding a loss.

PW and Fiducient Advisors are independent entities. There is no form of partnership or legal affiliation between PW and Fiducient Advisors nor is such a relationship created or implied by the information herein.


Expert insights delivered straight to your inbox.

We write to our friends and family every few weeks or so with big news, big ideas, and big updates. Sign up now and get the inside track.

wealth planning
hanging with grandson