Investing During a Recession

Recessions are times of economic slowdowns. You’ll often see friends and family losing their jobs, and you may cut down on costs and unnecessary luxuries. They are, however, a normal, if disconcerting, part of life.

To help ease some of your concerns, we spoke with a Certified Financial Planner about what investors can expect during a recession and how investors can handle the rough times.

A recession is a period of decline in the economy. Historically, recessions have been recognized as two consecutive periods of a negative gross domestic product (GDP), the value of goods and services produced.[1]

Recessions are a normal part of life. They are almost always accompanied by a decline in production and sales. As a result, there’s also often an increase in layoffs and an increase in unemployment.[3]

One of the most noticeable characteristics of a recession for investors is a decline in asset prices, including stocks. Before and during a recession, you’re likely to notice a decline in the value of your investments as a result of business slowdown and an overall lack of confidence in the economy.

You might be surprised to learn that expert advice for investing during a recession isn’t all that different from investing at any other time.

“The best way to invest depends on your personal goals and risk tolerance,” says Zachary Bachner, a Certified Financial Planner with Summit Financial Counseling, a financial advisor.

Another important component of investing during a recession is managing your emotions. Many people react to a recession by panic-selling their holdings. In reality, this is the opposite of what you should do. When you sell your assets after a market downturn, you’re locking in your losses and may end up buying those assets back at a higher price.

Instead of selling, investors should hold onto their assets and continue investing as they have been. So if you have an automatic contribution to your 401(k) with each paycheck, it’s best to keep making those contributions. That way, when the market eventually bounces back (as it always does), you’ll be able to reap the rewards.

Meet the Expert

Zachary Bachner, a Certified Financial Planner with Summit Financial Counseling, a financial advisor.

Investors might even decide to increase their investments to take advantage of the reduced market prices, Bachner says.

“A downturn in the market provides investors the opportunity to buy shares of companies at discounted prices,” Bachner says. “We always recommend allocating a portion of your budget to savings, but recessions may be a good time to invest any extra cash that might be on the sidelines.”

The stock market generally takes a hit during a recession, but not all industries and types of stocks are affected in the same way. Some sectors are more resilient during a recession.

“Defensive assets usually perform better due to their consistent business performance,” Bachner says.

Think: utilities and groceries. We obviously can’t live without food and electricity.

In addition to defensive stocks, Bachner points to stocks from large-cap and more established companies as being an attractive option. One reason investors turn toward these stocks is that they pay dividends, which are distributions companies make to shareholders as a way of passing along some of their profits. As a result, even if they aren’t increasing in price, they will offer investors an opportunity to earn some return in their portfolio.

Investors might also consider diversifying their investments. Increasing cash holdings to serve as an emergency fund in the case of job loss is one option. Another is bond investing in bonds, which are debt securities—in other words, loans—issued by corporations and government entities. They generally outperform stocks during a recession. While they often have low returns, they may still beat out the negative performance of many stocks.[4]

As we mentioned, a recession can be harmful to your entire investment portfolio, but there are some assets that perform especially poorly during a recession.

First, discretionary spending tends to decrease during a recession. Basically, we tend to cut out the luxuries like vacation and expensive meals when times get tighter. As a result, industries like retail, restaurants and hospitality are likely to see above-average declines.[5]

“People tend to restrict their budgets during a recession, so consumer discretionary investments tend to perform worse than other areas as well,” Bachner says.

Bachner also points to aggressive and growth stocks as being especially hard-hit during a recession. Growth companies are those that see higher sales and faster growth than the market average, often because of the stage they are in as a company. These stocks, which include smaller corporations and tech companies, tend to see major booms during bull markets (meaning the stock market is on the rise). But during a recession, they’re likely to underperform.

It’s easy to worry about the impact a recession can have on your investments. After all, many of us watched people see their retirement savings wiped away during the Great Recession from 2007 through 2009. Stock prices fell by about 50% during that time.[6]

But that financial crisis wasn’t necessarily representative of recessions overall. According to data from CFRA Research, the S&P 500 only lost an average of 8.8% during the four recessions since 1990. And while that’s still a loss, it’s nothing close to 50%.[7]

And consider this: The S&P 500 has almost quintupled since 2009. Those losses in many cases have more than been recouped.[8]

The U.S. has gone through recessions before, and will inevitably go through them again. The important thing to remember is the market has rebounded from every recession in history.

“Every recession in history has been resolved, and the market has reached new all-time highs,” Bachner says. “Things could always be different, but that would require a very drastic event domestically or globally that derails financial markets.”