When I published this post, the year 2020 had started. This marks the 2010s as the first decade we had no recession. Because the US market has not had a significant downturn in over a decade, many believe the US is due for another recession. It is still debatable if the US is due for a recession in the near future, but a recession is inevitable.
One of the worst things people can do before a recession is to stop investing though. Markets require investments to continue to grow. With news of a potential recession, many are afraid of investing. That is completely natural, but there are still many investment opportunities that are generally resistant to recessions. Note: there is no such thing as a recession proof investment. Anyone who says otherwise is scamming you. However, there are many investment opportunities that will increase the chances of wealth growth without the worries of heavy losses during a recession.
Real Estate – Especially Rentals
Everyone needs real estate. Even if the markets do not favor buying homes or buildings, people still need a place to stay and work. They will likely rent it instead. Rental properties will be in higher demand and have a good track record of returns in investments with or without a recession looming.
Rental properties are not recession proof investments. As I have pointed out, everyone needs real estate, but no one needs YOUR real estate. You will have to rent it to not only your typical tenants, but people who are scared, desperate, and may not even know how to handle living in a rental. You will have to distinguish a new batch of tenants from the good and the bad.
There are many different types of rental properties to try. From residential to commercial. Even vacation homes do well, especially those advertised on Airbnb. But the most important thing is where the property is. Location location location. It is different to buy a rental property in Arizona than North Carolina.
If you want to invest diversely in real estate there are a few options. These include REITs, companies that invest in income generating and Fundrise, a company that allows small investments in multiple properties.
Health Care Stocks
Everyone gets sick or injured at least once or a few thousand times in their lives. Healthcare will be needed during recessions. In addition, many of these healthcare companies provide consumer goods including baby powder, first aid, and other consumer medical products, which people tend to buy, even when in a pinch.
Take Johnson and Johnson. During the recession of 2008, their stock only dropped only 33% while the S&P 500 dropped almost 50%. Other healthcare companies followed a very similar suit.
This may be controversial, but defense stocks have been very sound investments. The military-industrial complex is a very stable machine. During recessions, spending tends to decrease. Not for defense industries, the US spends more in defense during recessions. And this has happened during five of the last six recessions. With raising tensions in the Middle East, legit or overexaggerated, I doubt that the US government will do the opposite in the next recession.
Politicians tend to avoid lowering spending for defense. By spending billions for the military, the US keeps high quality jobs in America and veterans employed. While many are against war, myself included, you will find very few against supporting engineers who design weapons, soldiers, or veterans.
If you do not feel like investing in healthcare or defense stocks, utility stocks have less controversy behind them. Next to no one can imagine living without electricity, hot water, or heating. Most people cannot live without them. Seriously, you would be surprised how many people die without air conditioning. Ask a hospital how many people die if the building has no air conditioning (granted the temperature does not need to be low).
Furthermore, you can try to delay paying many bills (I highly recommend paying all bills), but if you fail to pay your utilities bill, the utility companies will have no reservations shutting down your utility. Even if you are in a tight pinch, you will do everything you can to pay your utilities.
Duke Energy dropped only 34% during the recession compared to the almost 50% drop of the S&P 500. But I must warn you, generally utility stocks are at all-time highs so investing 101 states that now may not be the time to invest in these stocks if your risk tolerance is not very high.
Discount Retail Stocks
It does not matter if there is a recession or not, every person is a consumer every day of their lives. Even if you are in a pinch, you will likely need to grab certain goods. Are you going to turn to status stores such as “insert mall store name here,” are you going to turn to e-Commerce where you must pay extra for shipping? No, you will turn to discount retailers such as Walmart.
Other people have the same idea, which is why discount retailers are widely considered “recession proof investments.” Walmart only lost 10% during the recession of 2008. Be warned, Walmart did not have to deal with as large of a growth in e-Commerce during 2008 as it did today. It is possible discount retailers may not survive during the recession.
While it may not be the best idea to invest in an index fund that matches equities just before a recession, there are other funds you could attempt. Index funds that match equity markets have moderate rewards with moderate risks. If a recession is coming, the risks are too high for the moderate rewards.
Some other mutual funds invest in not only US equities, but bonds. The balanced fund I am largely invested in also invests in international equities. Funds like these will allocate risks when certain markets start to go. The potential gains for these funds are generally more moderate than pure equity funds, but the risks are far lesser. If domestic and international equity markets and the bond markets fall, I will not be worried about how much money is in my accounts and more worried about how much food I have in the pantry. Although generally balanced funds have smaller gains, the balanced fund I am largely invested in has an average 9.48% annual return, a rate surprisingly close to the average return of the S&P 500. If you invest in the right one, you may have similar returns.
There is no such thing as a risk-free investment, but no one can time the markets. Even with word of a recession looming, do you want to miss out on potential investment opportunities? Besides, it seems like every year a recession is looming, even the year after a recession. There are many “recession proof investments” you could make that are prone to growth during good times, and not very prone to drops during recessions.
Take this advice with a grain of salt though. Just because these investments are good during previous recessions does not mean they will be “recession proof investments.” Many of these stocks are upheld by policies or solidly-established systems. However, many of these investments are for products and services that are in constant demand. Unless some massive changes occur, the demand should always be constant. Investing in constant demand investments are a good way to forge your wealth.