3 Ways to Take Advantage of a Recession (2024)

The COVID-19-related recession of 2020 was just two months long, making it the shortest recession on record. Like all recessions, though, it impacted the lives of many. Now, as the economy may be headed into another downturn, it’s a good time to review how to take advantage of the recession instead of letting it take advantage of you.

There were a lot of lessons to be learned for investors, plenty of whom saw their investment accounts devastated by selling in the panic. In some cases, if they had held onto their investments, they would have fully recovered and gone on to increase in value.

The first lesson of a recession is that it is always followed by a recovery that includes a strong rebound in the stock market. The second lesson is that investors do not have to sit idle as their portfolios get pummeled by massive selling. There are some investment strategies that can take advantage of recessionary forces to position a portfolio for a quick and strong rebound.

Key Takeaways

  • Recessions have always been followed by a recovery that includes a strong rebound in the stock market.
  • When the market starts to plunge, it is time to take advantage by increasing your contributions to or starting dollar-cost averaging in a non-qualified investment account.
  • The best way to own dividend stocks is through mutual funds or exchange-traded funds (ETFs) that invest strictly in dividend-paying companies.
  • Consumer staples manufacturers weather recessions well, and there are several options to invest in this area.

1. Use the Dollar-Cost Average When Share Prices Decline

As with most recessions, you probably will not see the next one coming. But you will likely see a sell-off in the stock market well in advance of a recession. When that happens, remember the first lesson: The stock market will usually begin to bottom well before the end of the recession.

Knowing that, investors can take advantage of a declining market through the dollar-cost averaging method of investing. If you make monthly contributions to a qualified retirement plan, you are already using the technique. But when the market starts to plunge, it is time to take advantage by increasing your contributions to or starting dollar-cost averaging in a non-qualified investment account.

When you dollar-cost average your investing, you gradually reduce your overall cost basis in the share price. Then, when the price rebounds, your cost basis will often be lower than the price. For example, if you invest $500 a month in a mutual fund selling for $25, your contribution buys 20 shares. If the share price drops to $20, your contribution buys 25 shares. Your account now has 45 shares with an average cost basis of $22.

As the share price drops, your $500 contribution buys an increasing number of shares and your cost basis continues to drop. When share prices rebound, your contribution buys fewer shares each month, but the current share price is always higher than your cost basis. The dollar-cost averaging method works best over the long term for investors who do not want to worry about how their investments are performing.

If you are going to hold stocks during a recessionary period, the best ones to own are from established, large-cap companies with strong balance sheets and cash flows.

2. Buy into Dividends

If you are going to hold stocks during a recessionary period, the best ones to own are from established, large-cap companies with strong balance sheets and cash flows. Not only are these companies better situated to weather economic downturns than smaller companies with poor cash flows, but they are also more likely to pay dividends.

For investors, dividends serve a few purposes. First, if a company has a long history of paying and increasing dividends, you can have peace of mind that it is financially sound and can survive most economic environments. Second, dividends provide a return cushion. Even as share prices decline, you still receive a return on your investment. It is for these reasons that dividend stocks tend to outperform non-dividend stocks during market downturns.

The best way to own dividend stocks is through mutual funds or exchange-traded funds (ETFs) that invest strictly in dividend-paying companies. Funds that invest in companies with long histories of paying dividends and strong track records of increasing those dividends tend to generate high current yields and capital appreciation when the stock rebounds.

Funds that invest strictly in dividend-paying companies may not outperform the market during market rebounds. This is because these types of funds invest in companies that provide stable returns across different market cycles. Therefore, as the market rebounds, you can gradually allocate away from your dividend funds, but you should always maintain a portion as a defensive measure.

The dividend-adjusted close, oradjusted closing price, takes into account any distributions or corporate actions that occurred between the previous day’s closing price and the next day’s opening price. Dividends lower the value of a stock because profits are distributed toshareholdersrather than being invested back into the company.

3. Invest in Consumer Staples

Even during recessions, consumers need to buy food, drugs, hygiene products, and medical supplies. These are consumer staples, which are the last items to be cut from the family budget. So while companies selling high-end electronics and other discretionary products experience drops in revenue, companies selling food products and other basic necessities do not. Because of this, companies in the consumer staples sector are sometimes called defensive stocks, since they tend to remain resilient even when the economy falters.

Data shows that these types of companies outperformed the during the last several recessionary periods. Consumer staple companies include Johnson & Johnson, Procter & Gamble, Conagra, and Walmart. These particular companies also pay good dividends, which strengthens their defensive profile. There are also mutual funds that invest strictly in consumer staple companies. For example, the Fidelity Select Consumer Staples Portfolio invests a minimum of 80% of its assets in companies engaged in the manufacture, sale, or distribution of consumer staples.

What investments do well in a recession?

While there is no guarantee of the performance of any security, so-called defensive stocks, such as those in the consumer staples sector, tend to be resilient during recessionary periods. These companies make, sell, or distribute needed items such as food, drugs, medical supplies, and hygiene products.

What should you not do in a recession?

Financial risks tend to increase during a recession, so it’s best to avoid taking on any new and risky investments or financial commitments. Depending upon your position, industry, and experience, it’s also a good idea not to take your job for granted, or to dip into your savings unless it is necessary.

Where is your money safest during a recession?

Many investors turn to conservative asset classes such as bonds during recessionary periods. Mutual funds may also be a useful area to consider, and so may established, large-cap companies with strong balance sheets and cash flow.

The Bottom Line

Recessions are an inevitable part of being a participant in the financial world. They can be unpredictable and may also have a significant impact on many people. But there are ways to position yourself and your investments to be as prepared as possible for a recession. Focusing in on defensive plays like consumer staples stocks can help you to not only weather the storm of a recession but also potentially take advantage of it.

3 Ways to Take Advantage of a Recession (2024)

FAQs

How can I take advantage of 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

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

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.

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

Cash: Offers liquidity, allowing you to cover expenses or seize investment opportunities. Property: Can provide rental income and potential long-term appreciation, but selling might be difficult during an economic downturn.

What not to buy during a recession? ›

Don't: Take On High-Interest Debt

It's best to avoid racking up high-interest debt during a recession. In fact, the smart move is to slash high-interest debt so you've got more cash on hand. Chances are your highest-interest debt is credit card debt.

Should I take my money out of the bank before a recession? ›

Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.

Do you hold cash in a recession? ›

Yes, cash can be a good investment in the short term, since many recessions often don't last too long. Cash gives you a lot of options.

Is cash king during a recession? ›

For investors, “cash is king during a recession” sums up the advantages of keeping liquid assets on hand when the economy turns south. From weathering rough markets to going all-in on discounted investments, investors can leverage cash to improve their financial positions.

Should you stock up on food during a recession? ›

All Americans should have at least a three-day supply of food and water stored in their homes, with at least one gallon of water per person per day. If you have the space, experts recommend a week's supply of food and water. Choose foods that don't require refrigeration and are not high in salt.

What happens to CD rates during a recession? ›

As rates drop, banks can also cut back on the interest they pay to savers. So you'll typically see lower rates for deposit accounts, including savings accounts, CD accounts and money market accounts, during a recession.

What are five money saving tips to survive a recession? ›

Consider these five preemptive strategies that may help protect your finances in a recession.
  • Revisit your budget. Keeping close tabs on your budget is a cornerstone of good financial health, especially when inflation is high. ...
  • Pad your emergency savings. ...
  • Tackle debt. ...
  • Consider staying invested. ...
  • Maintain focus on your goals.

How much cash should I have on hand during a recession? ›

GOBankingRates consulted quite a few finance experts and asked them this question. They all said the same thing: You need three to six months' worth of living expenses in an easily accessible savings account. The exact amount of cash needed depends on one's income tier and cost of living.

How to prepare for a recession food? ›

Shelf stable foods are foods that don't need to be refrigerated or frozen to stay fresh. These are things like canned goods, dried fruits, nuts, and jerky. They're great to have on hand because they last a long time, so you can always have something to eat even in an emergency or unexpected situation.

How much cash should I keep at home in case of an emergency? ›

“As a general rule of thumb, having access to $1,000 in cash at home would ensure you can at least pay for immediate expenses in the case of a national emergency,” she said.

Who benefits the most from a recession? ›

Here's who reap the most financial rewards during a recession.
  • Those Who Take Advantage of Low CD Interest Rates.
  • Those Who Save with a Premier Money Market Account.
  • Those Who Borrow Short-Term with a Repo Agreement.
  • Where to Find Recession-Proof Savings.
Feb 16, 2023

How do you survive a recession financially? ›

Here are seven steps to help you prepare for a recession:
  1. Don't panic. ...
  2. Take a look at your finances. ...
  3. Get on a budget. ...
  4. Build up your emergency fund. ...
  5. Leave your investments alone. ...
  6. Pay down your debt. ...
  7. Reevaluate your job situation.
Apr 5, 2024

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