Recession-Proof Investments To Buff Your Portfolio

Key takeaways

• As recession fears mount and interest rates rise, investors are increasingly worried about how a downturn could hit their portfolios
• One of the worst moves investors can make during a recession is to bail on your portfolio
• Instead, consider recession-proof products to buoy your portfolio – and even catch the upside as the economy recovers

By now, you’re probably tired of hearing about the impending future recession. (And you certainly wouldn’t be alone.) Still, it’s important to prepare yourself emotionally and financially for the possibility. After all, one of the worst moves investors can make is letting a recession catch them unawares and bailing on their portfolios in response.

Fortunately, you can circumvent that risk by reviewing your portfolio early and understanding what you risk in a recession. Then, consider whether these recession-proof investments could help stave off the worst of the downturn – or even amplify your gains on the other side.

Want to put an insurance policy in place on your portfolio? Consider Portfolio Protection from Q.ai. It uses the power of AI to assess your portfolio’s sensitivity to risk every week, and then automatically implements sophisticated hedging strategies to protect against it.

Download Q.ai today for access to AI-powered investment strategies.

A quick word on recession-proof investments

Recessions can be detrimental to economies (and your portfolio) because of the wide-reaching downward spiral.

As consumers spend less money, businesses sell fewer products and services. In response, companies often lay off workers or cut wages and benefits, contributing to higher unemployment and less spending.

When profit margins and financial outlooks inevitably weaken, the markets falter, leading to deflated portfolios and depleted investment potential.

But not every investment suffers the same during a recession. Recession-proof investments, like certain stocks, bonds and cash investments, may see fewer losses or even gains when the economy tumbles.

Bear in mind that no business or investment is truly recession-proof, as there’s never a guarantee of gains. However, many are recession-resistant in that they may not suffer as severely as other businesses or investments when the economy sours. Often, these are called “defensive investments,” since they’re more resilient to economic declines.

Additionally, many investments that struggle early on may ride the upside when the economy recovers. While these don’t hedge against an ongoing recession, you can still capitalize by adding these investments to your long-term strategy at a discount.

Remember: maintaining a balance between risk and returns is always important. But when it comes to recessions, it’s not just about your positions going in. It’s also about where you invest during the recession.

That said, let’s take a look at the recession-proof investments to consider ahead of a potential economic downturn (and a few to look at once it’s already begun.)

Stocks

It’s tempting to flee stocks and preserve wealth when a recession hits – but that may not be your wisest move. Even when the economy shudders, so-called “recession-proof stocks” are likely to continue generating returns. Others may lose value now, but if you hop in on the bottom floor, you can ride the recovery on the other side.

Dividend-paying stocks

Quality dividend-paying stocks can provide extra passive income in good times and bad. But when a recession hits, you might look specifically for dividend aristocrats and dividend kings – companies that have paid dividends consistently for decades.

Not only are they more likely to continue paying out during a recession, but they may see fewer or smaller price fluctuations than, say, growth stocks. This added stability can smooth over short-term portfolio volatility while bolstering your recession-era income.

Consumer essentials and defensive stocks

Defensive and consumer essential stocks can further insulate your portfolio in rough markets. You can find these equities in industries that consumers directly or indirectly rely on regardless of economic headwinds, such as:

• Consumer staples (groceries, household goods, warehouse chains, etc.)
• Guilty pleasures like alcohol and tobacco
• Shipping and transportation
• Utilities like electricity and water works
• Healthcare, including drug stores, pharmaceuticals and medical providers
• Insurance, including home, car and medical insurance

While many of these industries rarely see massive growth spurts, their essentiality and ubiquity make them invaluable hedges during downturns.

As always, diversification is the name of the game here. There’s no use trying to pick individual stocks to create a ‘safer’ portfolio, because anything can happen to individual companies. You want to spread your cash far and wide to limit the downside as much as possible.

Examples include the iShares U.S. Consumer Staples ETF, the Vanguard Consumer Staples ETF, the Health Care Select Sector SPDR Fund and the Fidelity MSCI Utilities Index ETF.

Cyclical stocks

Cyclical stocks are issued by companies whose performance depends on the economic cycle. Think cars, nonessential household goods like furniture and appliances, restaurants and certain materials providers and manufacturers.

Many of these stocks are among the hardest-hit when the economy contracts. But when the economy reopens, they may enjoy outsize gains as spending ramps up and profits return.

In other words: you may not want to invest in cyclical stocks when a recession sets in. Still, you can capitalize on their bad fortune by buying in at a discount mid-recession. Then, when the economy recovers, you can ride the rise on the other side.

Examples include General Motors, Nike, Starbucks and Chipotle, but again, ETFs and funds that contain stocks like these are likely to be a better option for most investors.

Stock funds & ETFs

If you prefer not to pick your own stocks, or you’re taking our advice and looking for more diversification, stock funds like ETFs and mutual funds provide an easier alternative. These assets offer instant diversification and may see less volatility than more concentrated portfolios during uncertain markets. Plus, you don’t have to spend tons of time managing your portfolio when the waters get rough.

Index funds are a popular kind of stock fund in all economic climates. These funds passively track specific indexes – like the S&P 500 – to match market returns.

You can also invest in industry-specific funds that provide diversified exposure within a given niche. Many goal-based funds also exist to help investors achieve specific gains, counter inflation or enjoy broad ESG exposure.

Some examples of broad spectrum index include the Fidelity 500 Index Fund or the Vanguard Russell 1000 Index Fund. If you’re looking for a sustainable ESG fund or ETF, some popular examples are Invesco MSCI Sustainable Future ETF or the Fidelity Clean Energy ETF.

Bonds

Some investors consider bonds to be relatively safe investments during periods of economic instability. Generally, they offer guaranteed interest payments on a regular schedule until maturity, which can provide a lifeline during a downturn. (Particularly government bonds, which are backed by the U.S. government rather than corporations.)

You can also choose from a range of maturities or even select bonds that pay interest rates pegged to inflation (TIPS) for extra protection.

And while bonds have taken a hit this year as interest rates have risen, that may not be a bad thing ahead of a potential recession. Lower bond prices now means a chance to buy in at a discount compared to future prices.

For investors wanting the safest bonds out there, 10-year U.S. Treasury Bonds are generally considered the only ‘risk-free’ asset you can buy. For investors who want the potential for a little higher yield from their bonds, a mixture of corporate and higher yield government bonds might work better.

Some ETFs that can offer access to these include the iShares iBoxx $ Investment Grade Corporate Bond ETF and the Vanguard Total International Bond ETF.

Cash and cash equivalents

Cash is a crucial component of most short-term investment strategies designed to protect and grow cash you’ll need in under 5 years. While even high-yield accounts typically lose ground to inflation, the current high-rate environment may prove particularly fruitful in a potential recession.

High-yield savings accounts

As evidenced by the name, high-yield savings accounts generally pay higher interest rates than regular savings accounts. They also offer FDIC protection, literally insuring your cash against worst-case scenarios. As we’ve seen with the collapse of Silicon Valley Bank, this is important. While depositors have been bailed out this time, it’s not a guarantee that will always be the case.

Certificates of deposit

Certificates of deposit, or CDs, also pay higher-than-average interest rates and offer FDIC insurance. But they differ from savings accounts in a few important ways.

To start, CDs lock up your funds for a set period of time ranging from a few months to over a decade. If you try to withdraw your funds early, you may incur a penalty.

Additionally, most CDs pay a guaranteed interest rate until maturity. That means if you lock in a high interest rate now, your funds will continue to grow at that rate even if market rates fall later.

If you don’t need your cash immediately, CDs make a great place to stash funds during a recession or high-rate environments. You can even “ladder” your CDs to lock down shorter-term maturities on an ongoing basis until you’re ready to cash out.

Money market accounts

Money market accounts generally pay higher interest rates than traditional savings accounts while offering similar check-writing abilities to checking accounts. They also offer FDIC insurance to protect your funds, though they may impose withdrawal or balance requirements. Their increased safety profile makes them an ideal recession-proof product for short-term or risk-averse investors.

Yourself

In all this, it’s important not to undervalue yourself as a recession-proof product. Even if you lose your job or see your hours cut, you can invest in yourself by gaining new knowledge to get a better job or explore a new industry. You might consider taking work-sponsored workshops, online educational courses, or even teaching yourself a new skill like coding or painting.

But investing in your career doesn’t have to be your limit. You might put some effort toward aggressively paying down your debts ahead of a potential recession, especially with the specter of higher interest rates on the horizon. The less money you have to put toward bills in the future, the more security you’ll enjoy during a crisis.

Who needs recession-proof products when you have AI?Even if you know what you’re looking for, picking the best recession-proof products requires a lot of research and energy. Fortunately, there are other options – namely, harnessing the power of artificial intelligence to do the heavy lifting for you.

Here at Q.ai, that’s exactly what we offer.

We start you off with your choice of expertly-curated Investment Kits, each designed to achieve a particular goal. (Foundational Kits? Check. Emerging Tech? You got it. Guarding against inflation? Sure thing.)

From there, our artificial intelligence takes the lead to keep your asset allocation and risk tolerance perfectly balanced. For extra peace of mind, you can even toggle on Portfolio Protection to protect your gains and minimize the risk of loss.

No, we can’t promise any of this is recession-proof – and no one else can, either. What we can offer is the opportunity to let an expert AI maintain your portfolio and respond to (or even anticipate) market moves to help you build greater long-term wealth.

Recession or not, that’s a powerful thing.

Download Q.ai today for access to AI-powered investment strategies.