What’s the Best Investing Strategy to Have During a Recession? (2024)

During a recession, investors need to act cautiously but remain vigilant in monitoring the market landscape for opportunities to pick up high-quality assets at discounted prices. These are difficult environments, but they also coincide with the best opportunities.

In a recessionary environment, the worst-performing assets are highly leveraged, cyclical, and speculative. Companies that fall into any of these categories can be risky for investors because of the potential that they could go bankrupt.

Conversely, investors who want to survive and thrive during a recession will invest in high-quality companies that have strong balance sheets, low debt, good cash flow, and are in industries that historically do well during tough economic times.

Key Takeaways

  • During a recession, most investors should avoid investing in companies that are highly leveraged, cyclical, or speculative, as these companies pose the biggest risk of doing poorly during tough economic times.
  • A better recession strategy is to invest in well-managed companies that have low debt, good cash flow, and strong balance sheets.
  • Countercyclical stocks do well in a recession and experience price appreciation despite the prevailing economic headwinds.
  • Some industries are considered more recession-resistant than others, such as utilities, consumer staples, and discount retailers.

Types of Stocks with the Biggest Recession Risk

Knowing which assets to avoid investing in can be just as important to an investor during a recession as knowing which companies make good investments. The companies and assets with the biggest risk during a recession are those that are highly leveraged, cyclical, or speculative.

Highly Leveraged Companies

During a recession, most investors would be wise to avoid highly leveraged companies that have huge debt loads on their balance sheets. These companies often suffer under the burden of higher-than-average interest payments that lead to an unsustainable debt-to-equity (DE) ratio.

While these companies struggle to make their debt payments, they are also faced with a decrease in revenue brought about by the recession. The likelihood of bankruptcy (or at the very least a precipitous drop in shareholder value) is higher for such companies than those with lower debt loads.

Credit Crunch

The more leveraged a company is, the more vulnerable it can be to tightening credit conditions when a recession hits.

Cyclical Stocks

Cyclical stocks are often tied to employment and consumer confidence, which are battered in a recession. Cyclical stocks tend to do well during boom times, when consumers have more discretionary income to spend on nonessential or luxury items. Examples would be companies that manufacture high-end cars, furniture, or clothing.

When the economy falters, however, consumers typically cut back their spending on these discretionary expenses. They reduce spending on things like travel, restaurants, and leisure services. Because of this, cyclical stocks in these industries tend to suffer, making them less attractive investments for investors during a recession.

Cyclical Assets

Stocks that move in the same direction as the underlying economy are at risk when the economy turns down.

Speculative Stocks

Speculative stocks are richly valued based on optimism among the shareholder base. This optimism is tested during recessions, and these assets are typically the worst performers in a recession.

Speculative stocks have not yet proven their value and are often seen as under-the-radar opportunities by investors looking to get in on the ground floor of the next big investment opportunity. These high-risk stocks often fall the fastest during a recession as investors pull their money from the market and rush toward safe-haven investments that limit their exposure during market turbulence.


Speculative asset prices are often fueled by the market bubbles that form during an economic boom—and go bust when the bubbles pop.

Stocks That Often Do Well During Recessions

While it might be tempting to ride out a recession with no exposure to stocks, investors may find themselves missing out on significant opportunities if they do so. Historically, there are companies that do well during economic downturns. Investors might consider developing a strategy based on countercyclical stocks with strong balance sheets in recession-resistant industries.

Strong Balance Sheets

A good investment strategy during a recession is to look for companies that are maintaining strong balance sheets or steady business models despite the economic headwinds. Some examples of these types of companies include utilities, basic consumer goods conglomerates, and defense stocks. In anticipation of weakening economic conditions, investors often add exposure to these groups in their portfolios.

By studying a company’s financial reports, you can determine if they have low debt, healthy cash flows, and are generating a profit. These are all factors to consider before making an investment.

Strong Balance Sheets

Companies with strong balance sheets are less vulnerable to tightening credit conditions and have an easier time managing the debt that they do have.

Recession-Resistant Industries

While it might seem surprising, some industries perform quite well during recessions. Investors looking for an investment strategy during market downturns often add stocks from some of these recession-resistant industries to their portfolios.

Countercyclical stocks like these tend to do well during recessions because their demand tends to increase when incomes fall or when economic uncertainty prevails. The stock price for countercyclical stocks generally moves in the opposite direction of the prevailing economic trend. During a recession, these stocks increase in value. During an expansion, they decrease.

These outperformers generally include companies in the following industries: consumer staples, grocery stores, discount stores, firearm and ammunition makers, alcohol manufacturers, cosmetics, and funeral services.

Consumer Demand

Many of these companies see an increase in demand when consumers cut back on more expensive goods or brands or seek relief and security from fear and uncertainty.

Investing During the Recovery

Once the economy is moving from recession to recovery, investors should adjust their strategies. This environment is marked by low interest rates and rising growth.

The best performers are those highly leveraged, cyclical, and speculative companies that survived the recession. As economic conditions normalize, they are the first to bounce back and benefit from increasing enthusiasm and optimism as the recovery takes hold. Countercyclical stocks tend not to do well in this environment. Instead, they encounter selling pressure as investors move into more growth-oriented assets.

Risky, leveraged, speculative investments benefit from the rise in investor sentiment and the easy money conditions that characterize the boom phase of the economy.

Is It Risky to Invest When a Recession is Nearing?

When an economy is nearing recession, chances are that markets will also fall as profits shrink and growth turns negative. During a recession, stock investors must use extra caution, as there is a good chance that they will see price depreciation of their investments. That said, timing a recession is difficult to do, and selling into a falling market may be a bad choice. Most experts agree that one should stay the course and maintain a long-term outlook even in the face of a recession, and use it as an opportunity to buy stocks “on sale.”

Which Assets Tend to Fare Best in a Recession?

Not all assets are impacted the same way by a recession. As spending shifts to basics, consumer staples, utilities, and other defensive stocks may fare better. Companies with strong balance sheets will also be able to weather a temporary decline in profits more than a high-spending growth stock. Outside of stocks, bonds may rise and interest rates are cut in response to an economic contraction.

Which Stocks Are Hurt the Most by Recession?

Growth stocks without strong balance sheets and high debt loads are often the most vulnerable to a recession. This is because they may find it hard to raise new capital as the economy contracts, while their profits can be eroded by lower consumer spending. Speculative stocks with shaky fundamentals are among the most risky as a recession hits.

The Bottom Line

Every recession eventually turns around and goes up over the long run. By developing a strategy based on countercyclical stocks with strong balance sheets in recession-resistant industries, investors can get in on one of the biggest market booms and avoid the turbulence that often results when the economy weakens.

Long-term investors willing to stand through these volatile times eventually will be able to reap the rewards. They may also be able to sell quickly and buy more profitable assets when the bear market is in full force and position themselves ahead of the recovery for even bigger gains when the market improves.

What’s the Best Investing Strategy to Have During a Recession? (2024)


What’s the Best Investing Strategy to Have During a Recession? ›

During a recession, investing in cash and cash equivalents becomes a strategic choice for investors who are hoping to preserve their capital and maintain liquidity. Cash equivalents include short-term, highly liquid assets with minimal risk, such as Treasury bills, money market funds and certificates of deposit.

What investments are best in a recession? ›

A good investment strategy during a recession is to look for companies that are maintaining strong balance sheets or steady business models despite the economic headwinds. Some examples of these types of companies include utilities, basic consumer goods conglomerates, and defense stocks.

How to build wealth during a recession? ›

5 Things to Invest in When a Recession Hits
  1. Seek Out Core Sector Stocks. During a recession, you might be inclined to give up on stocks, but experts say it's best not to flee equities completely. ...
  2. Focus on Reliable Dividend Stocks. ...
  3. Consider Buying Real Estate. ...
  4. Purchase Precious Metal Investments. ...
  5. “Invest” in Yourself.
Dec 9, 2023

Where is the safest place to put your money during a recession? ›

Saving Accounts

Like checking accounts, they're federally insured and are generally the simplest and safest place to keep cash in good times and bad. Other advantages of savings accounts include: Simple to open and maintain. Deposits are fully insured.

What stocks to avoid during a recession? ›

On the negative side, energy and infrastructure stocks have been the hardest-hit in recent recessions. Companies in these sectors are acutely sensitive to swings in demand. Financials stocks also can suffer during recessions because of a rising default rate and shrinking net interest margins.

What is the best asset to hold during a recession? ›

Still, here are seven types of investments that could position your portfolio for resilience if recession is on your mind:
  • Defensive sector stocks and funds.
  • Dividend-paying large-cap stocks.
  • Government bonds and top-rated corporate bonds.
  • Treasury bonds.
  • Gold.
  • Real estate.
  • Cash and cash equivalents.
Nov 30, 2023

Is it smart to invest during a recession? ›

As such, investing during a recession can be a good idea but only under the following circ*mstances: You have plenty of emergency savings. You should always aim to have enough money in the bank to cover three to six months' of living expenses, with the latter end of that range being more ideal.

What not to do in a recession? ›

What Are the Biggest Risks to Avoid During a Recession? Many types of financial risks are heightened in a recession. This means that you're better off avoiding some risks that you might take in better economic times—such as co-signing a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt.

Can you become a millionaire in a recession? ›

As you can see, getting rich during a recession isn't that complicated. Keep your expenses low, make sure you have steady income, and invest as much as possible. If you're able to do that, you'll come out ahead.

What gets cheaper during a recession? ›

Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same. In contrast, things considered to be wants instead of needs, such as travel and entertainment, may be more likely to get cheaper.

Is it better to have cash or property in a recession? ›

Cash. Cash is an important asset when it comes to a recession. After all, if you do end up in a situation where you need to pull from your assets, it helps to have a dedicated emergency fund to fall back on, especially if you experience a layoff.

Can banks seize your money if the economy fails? ›

The short answer is no. Banks cannot take your money without your permission, at least not legally. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder, per bank. If the bank fails, you will return your money to the insured limit.

Where do you put extra money during a recession? ›

During a recession, many investors put money in savings accounts to keep money handy and earn interest on savings. Consider investing in a savings account if you're building an emergency fund or prefer stable returns (right now, the top accounts offer rates around 4%-5%).

What should I not buy during a recession? ›

During an economic downturn, it's crucial to control your spending. Try to avoid taking on new debt you don't need, like a house or car. Look critically at smaller expenses, too — there's no reason to keep paying for things you don't use.

What are the CDs and should I invest my money in them during a recession? ›

A certificate of deposit (CD) is a good alternative if you're risk-averse when it comes to investing. A CD is a type of savings account that allows people to earn interest at a fixed rate often higher than what's available with traditional savings accounts.

Who makes money during a recession? ›

Companies in the business of providing tools and materials for home improvement, maintenance, and repair projects are likely to see stable or even increasing demand during a recession. So do many appliance repair service people. New home builders, though, do not get in on the action.

What stocks go up during a recession? ›

Generally, the industries known to fare better during recessions are those that supply the population with essentials we cannot live without that. They include utilities, health care, consumer staples, and, in some pundits' opinions, maybe even technology.

Where does money go in a recession? ›

During recessions, one of the primary culprits responsible for money vanishing into thin air is the collapse of banks. As financial institutions crumble under the weight of bad loans and dwindling assets, they often go belly up, taking the money entrusted to them along for the ride.

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