What To Invest in During a Recession: An Overview of the Best Investments During a Recession

With inflation on the rise and sharp declines in the stock market, many are fearful of an impending recession. While we won’t deny the discomfort of investing in a recession, it doesn’t have to derail your approach to investing. With the right strategies, investing in a recession can actually present a wealth of opportunity.

If you’re wondering how to prepare for a recession, there are a few places to put your money that have proven successful even amid a volatile market, including:

• Strong-performing sectors
• Stocks in healthy companies 
• Dividend stocks and fixed-income investments 
• Mutual funds and index funds

Keep reading to learn what to invest in during a recession. 

Strong-performing sectors

The stock market includes shares from thousands of different companies, which are broken into different sectors. A sector is a group of companies with similar business products, services, or characteristics. 

Of the 11 sectors total, these have historically performed the strongest during a recession: 

1. Consumer staples
2. Energy
3. Health care
4. Utilities

These sectors, such as health care and consumer staples, are considered essential—recession or not, people still need things like medical care, food, and power. The same can’t be said about cyclical stocks in the consumer discretionary sector—these companies cater to nonessential wants versus needs. 

Essential sectors typically maintain their income streams and overall stability even when the market is volatile. This makes their stocks, known as defensive stocks, a favorable investment option leading up to and during a recession. 

To invest in these sectors during a period of market downturn, assess the different companies in sectors like health care, consumer staples, energy, and utilities. The health care sector, for example, is made up of pharmaceutical and biotech companies. The consumer staples sector includes household and personal care products—think food and beverage (grocery stores), toilet paper, or cleaning products. 

Stocks in healthy companies

Stocks from the sectors outlined above are a great place to put your investments during a recession, but purchasing a stock just because it’s in a defensive sector isn’t a good strategy. 

You should also pay attention to the quality of those stocks—which means purchasing stocks from the healthiest companies. Researching the specific companies you’ll invest in is imperative to successfully investing during a recession. 

Remember that whatever stock you choose, the company should still have healthy margins. 

How to find recession-proof companies

So far we’ve outlined where to focus when choosing recession investments, but how do you actually identify and vet those companies? One helpful way is by using a free stock screener like Yahoo! Finance. 

A stock screener can give you a list of suggested stocks to consider based on some information you provide. 

Consider the following to include in your stock screen: 

• Market cap: choose “large cap” or larger to filter by the largest companies in the U.S. that are typically more stable during recessions and have a low risk of going out of business. 
• Price: choose a price that’s higher than the performance of a broad index like the S&P 500. 
• Sector: choose a sector like energy, consumer staples, or health care. 

Even if you don’t use a stock screening tool, researching a company’s financial performance is a must. An alternative is to use the SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) tool to pull companies’ annual financial reports. Then, you can evaluate things like: 

• Profit and loss statements
• Cash flow statements
• Operating cost
• Revenue and expenses
• Increases or decreases in net profit 
• Outstanding debt

All of these specifications are meant to provide you with stocks from companies with healthy financials overall, regardless of market performance. This is a good indication that they can endure times of recession, too. 

Dividend stocks and fixed-income investments 

Dividend-paying stocks or fixed-income investments like bonds are highly sought after during recessions because they provide a steady, predictable source of income. 

Dividend stocks are shares of a company that allocates a portion of its profit to shareholders (depending on how many shares they own). Fixed-income investments like bonds offer regular payments in the amount of interest earned over time. Regardless of which you choose, they both offer a stable cash flow even if there’s a recession. 

High-quality dividend stocks are found in companies with a reputable history of paying strong dividends to shareholders. Aside from being a great diversification tool, the beauty of dividend-paying stocks is that you can reinvest those dividends and let your money compound over time. 

While bonds also offer regular payments, they’re structured differently than stocks. A bond is a form of debt—it’s essentially an IOU from a corporation or government entity that offers regular interest payments plus the principal amount you invested at the end of a certain period of time. 

Aside from reliable streams of income, dividend-paying stocks and fixed-income investments are popular recession investments because they allow for diversification. Diversification can reduce overall risk in your portfolio, and bond values tend to perform inversely to the rise and fall of stock prices. If you’re invested in both, you can lower the volatility of fallen stock values during a recession. This allows for more stability and balance in your portfolio when the market is down.

Mutual funds and index funds

Mutual funds like exchange-traded funds (ETFs) and low-cost index funds offer a less risky alternative than investing in individual stocks—something that’s top of mind during a recession. 

These types of funds expose you to an entire basket of securities rather than just a single stock, so if the performance of one company goes down, the stronger performance of the others in your “basket” can balance things out. This is the essence of diversification.

You can buy a mutual fund, index fund or ETF that tracks a specific sector. So, if you’re looking to invest in a defensive sector like consumer staples or energy, you can look for funds in that category. The fund you choose will include a collection of stock shares from a variety of companies within that sector. 

Plus: tips for how to invest during a recession

There’s no denying the fear you might be feeling amid a volatile and uncertain market. That said, it’s important to keep your long-term investing vision in mind and realize that market fluctuations are simply par for the course. 

When it comes to knowing what to do in a recession, keep these tips in mind:

• Keep calm: keep a level head at all times—making rash decisions based on fearful emotions can cause more harm than good. 
• Don’t try to time the market: no one can predict what the market will do today, tomorrow, or next year. Position yourself for success by continuing to regularly invest over time, regardless of market performance.  
• Avoid panic-selling: tempting as it may be to sell a low-performing stock, panic-selling only guarantees your loss. 
• Stay the course: a long-term investment strategy means riding the ups and downs of the market. This will always be a more certain path to building wealth than any short-term strategy. 

Young investors with a long time horizon can take heart knowing that a long-term strategy provides inherent protection from the market over time. Things might look bad now, but the market almost always rebounds—and so will your investments in the long run. Now that you know what to invest in during a recession, you can go forward confidently and continue building your portfolio. Your future self will thank you! 

FAQs about what to invest in during a recession

For any lingering questions about what happens during a recession, we’ve got you covered. 

What is the safest investment during a recession?

Many investors see bonds as a safer place to invest during a recession. That’s because during times of market volatility, fixed-income investments generally maintain or increase their value. 

What should you not invest in during a recession?

Recession or not—but especially during a recession—avoid investing in companies that don’t have a record of strong financial performance. Poor cash flows, high operating costs, high amounts of debt, and tight margins are all indicators of what not to invest in during a recession. 

Why can recessions create good investment opportunities? 

Sharply declining stock prices during a recession offers the chance to buy shares at bargain prices. Since the stock market has historically recovered following a decline, you can expect to reap the rewards of future returns on those investments once the market stabilizes. 

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