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20 Best Recession Proof Assets & Investments

Do you want to invest in an asset that is immune to economic downturn? If YES, here are 20 best recession proof investments and asset classes.

No matter how we see it, recessions are a crucial part of the economic cycle. Aside from a contracting economy, recessions produce results and corrections, market crashes and bear markets. It can also establish some of the best opportunities in the investments market. Effectively investing during a recession can result in smaller losses, leaving more capital to reinvest at lower prices.

Recession simply means that the total amount of economic growth is falling. Some sectors may continue to grow, while others contract – but the overall level of activity falls during a recession. Consumers can become over indebted, company valuations can be too high, or available capital can run out.

Also, when economic indicators point to a recession, confidence falls and a cycle of falling investment and spending start. Normally, central banks often try to cut interest rates to encourage companies to continue investing. Eventually the decline slows, and investment picks up as confidence returns to the economy.

Investing during a recession should be approached from both a long term and short-term perspective. In terms of long term, your portfolio must be able to weather unpredicted recessions and volatility.  This is achieved through strategic asset allocation, which we will discuss subsequently.

While for short term, when the probability of a recession is high, you will be looking to move part of your portfolio into recession-proof investments. This tactic is popularly known as tactical asset allocation. Many of the options below are considered defensive investments, while others are simply less likely to drop during a recession. Be sure to thoroughly scrutinize all before you invest.

20 Best Recession Proof Assets & Investments

  1. Federal Bond Funds

Many types of bond funds are particularly popular with risk-averse investors. Investors face no credit risk especially since the government has the ability to levy taxes and print money, which eliminates the risk of default and provides principal protection. Bond funds investing in mortgages securitized by the Government National Mortgage Association (Ginnie Mae) are also backed by the full faith and credit of the U.S. government.

Most of the mortgages (typically, mortgages for first-time homebuyers and low-income borrowers) securitized as Ginnie Mae mortgage-backed securities (MBS) are those guaranteed by the Federal Housing Administration (FHA), Veterans Affairs or other federal housing agencies.

  1. Health Care Stocks & Funds

Irrespective of the state of the economy, people still get sick and injured. Diabetes doesn’t go away at a specific GDP contraction rate. Agreeably, if you lose your job, you’ll postpone that elective surgery you’ve been considering. But by and large, the medical industry continues chugging along in good, bad, or indifferent economies.

Under the umbrella of the health care industry fall hospitals, day surgery centres, pharmaceutical companies, medical device companies, and companies that produce health care products such as bandages. You can pick individual stocks, or you can diversify by investing in an index fund through a broker like Ally Invest.

  1. Municipal Bond Funds

This is issued by state and local governments; these investments leverage local taxing authority to provide a high degree of safety and security to investors. They carry a greater risk than funds that invest in securities backed by the federal government but are still considered to be relatively safe.

  1. Utility Stocks & Funds

People still need electricity, even when the economy shrinks. Indeed, when money is tight, you look for ways to lower your heating bill. But while patients have the option not to pay their medical bills, if you don’t pay your utility bill, you lose your electricity and gas.

That’s why utilities are among the last bills people default on when they’re low on cash. Another benefit of utility stocks is their high dividends, as one glance at Sure Dividend’s list of high dividend stocks makes clear. These tend to be steady income-producing stocks, rather than erratic growth-oriented stocks. They’re steady to the point of being downright boring.

  1. ESG Strategies

A growing body of evidence suggests environmental, social and governance factors affect the long-term value of a company. ESG investing is rapidly becoming a viable compliment to factor investing. Reports have it that management teams that take ESG issues seriously remove risk from their companies.

Since investing during a recession entails moving to assets with lower risk, these companies tend to outperform. Thus, stocks with high ESG scores may prove to be more recession-proof investments.

  1. Military & Defence Contractors

No matter what you think about the military industrial complex, it’s the ultimate survivor. Crime and terrorism rates increase during recessions and there are constant needs to ensure peace and safety. Other types of subsidies come and go with the politicians in office, but the military industrial complex is a machine that rarely slows.

The money keeps flowing, never mind that it’s the private contractors who see the profits and benefits, not necessarily military service members. And when the economy tumbles, the government tends to spend more money, not less. Never underestimate the U.S. government’s desire to spend money, especially on the military industrial complex.

  1. Cash

You should always have some cash in savings accounts. There are several reasons for this, especially in year 2022. Cash will still generate a small return as compound interest accumulates. It will also lower the volatility of your portfolio, giving you peace of mind and preventing irrational decision making. Most importantly, having cash available will allow you to pick up bargains when the correction slows.

  1. Low-Cost Retailers & Chains

Although people may stop buying shoes at Gucci stores during recessions, but they don’t stop buying clothes at Wal-Mart. In fact, they suddenly start flocking to discount retailers for more of their needs.

For instance, during the Great Recession, Wal-Mart’s sales drove up, not down; they rose by 11% from late 2007 to late 2010. Investors noticed too, and their stock returned 21% including dividends. The same goes for restaurants. Middle-Class Mike might stop eating at steakhouses when the economy tightens, but he won’t shun McDonald’s.

See it from a habit perspective: It’s easier to change where you shop or eat than it is to stop shopping or eating out entirely. To go from eating half your dinners out to cooking every single night takes an enormous shift in behaviour. But eating at Red Lobster instead of the upscale seafood restaurant across the street? That’s an easy migration.

  1. Taxable Corporate Funds

Taxable bond funds issued by corporations are also a consideration. They provide higher yields than government-backed issues but carry significantly more risk. Choosing a fund that invests in high-quality bond issues will help lower your risk. While corporate bond funds are riskier than funds that only hold government-issued bonds, they are still less risky than stock funds.

  1. Tobacco & Low-Cost Alcohol Stocks

Note that tobacco and alcohol are discretionary expenses, and discretionary expenses are meant to theoretically plummet during recessions. If people can barely afford their rent and utilities, how can they possibly go out and spend money on tobacco and booze?

But you have to consider it in the context of what people are actually buying with these goods: comfort. During times of stress, people tend to smoke and drink more, not less. But try not to generalize this effect to all sin stocks. Casinos and other gambling-related stocks perform terribly during recessions. And like retailers and restaurants, people flee from high-end alcohol to the lower end of the spectrum.

  1. Real estate

Even, real estate is less liquid than listed instruments like stocks. It simply means real estate valuations are less volatile. While unlisted real estate is less volatile, it isn’t necessarily less risky in the longer term.

If your risk tolerance is low, you should be cautious with this sector. It’s critical to note that listed real estate investments like REITs are very different. Listed real estate is more correlated to interest rates and can come under pressure if rates rise.

  1. Low-Volatility Funds

Volatility is a measure of risk, and low-volatility funds are specifically designed to sway less with the mood of the market. They also tend to have lower returns, although, that’s what you get when you aim for low risk. Moreover, these funds operate by screening for the least volatile funds in a specific index or market.

In many cases, that means they include lots of the stock types already outlined above, such as utility and health care stocks. Some low-volatility funds take it a step further and also identify stocks with minimum correlation with one another. That leads to a more diverse fund with greater exposure to different sectors.

  1. Money Market Funds

When it comes to avoiding recessions, bonds will certainly remain popular, but they aren’t the only game in town. Ultra-conservative investors and unsophisticated investors often stash their cash in money market funds. While these funds provide a high degree of safety, they should only be used for short-term investment.

  1. High-Dividend Stocks & Funds

For most stocks and funds, the primary returns depend on their yield, not their growth. Utilities and REITs (including mortgage REITs) are common examples. These stocks and funds tend to be less volatile and suffer minimal losses during recessions as they generate ongoing income. And because they provide an income stream alternative to bonds, they tend to do well when bond yields dip – like, for example, when central

  1. Private Equity and Venture Capital

Just like real estate, private equity and venture capital funds are less liquid than listed instruments. The value of private investments is related to a company’s long-term prospects rather than market forces. So, they are still vulnerable to a recession, but not to the same extent as stocks.

  1. High-Quality Companies With Strong Balance Sheets

Noteworthy, strong companies aren’t going anywhere, even during a recession. But how do you identify a strong company versus a vulnerable company? You just have to use fundamental analysis to evaluate companies. It mandates you to run numbers such as revenue, earnings per share, and price-to-earnings ratio to better understand how the company compares with others in its industry.

As you review a company’s balance sheet, get a sense of their assets. A company with hefty current and long-term assets and relatively few liabilities can typically withstand a recession. These companies’ overleveraged competitors cannot, which means that if a recession hits, strong companies tend to emerge even stronger with a greater market share.

  1. Large-Cap Funds

Traditionally, funds investing in large-cap stocks tend to be less vulnerable than those in small-cap stocks, as larger companies are generally better positioned to endure tough times. But shifting assets from funds investing in smaller, more aggressive companies to those that bet on blue chips  provide a way to cushion your portfolio against market declines without fleeing the stock market altogether.

  1. Treasury Bonds

No list of recession-proof investments would be complete without U.S. Treasury bonds. Note that in a recession, the Federal Reserve tends to lower interest rates. As interest rates drop, so do bond yields, it mean that bond prices heighten.

That serves you just fine as a holder of higher-yield bonds bought pre-recession. Remember, you have several options for investing in Treasury bonds. One option is Treasury Inflation-Protected Securities (TIPS), and another is bond mutual funds.

  1. Hedge and Other Funds

For richer investors, investing a portion of your portfolio in hedge funds is one idea. Hedge funds are designed to make money regardless of market conditions. Investing in a foul weather fund is another idea, as these funds are specifically designed to make money when the markets are in decline. Together, these funds should only represent a small percentage of your total holdings.

In the case of hedge funds, hedging is the practice of attempting to reduce risk, but the actual goal of most hedge funds today is to maximize return on investment. Note that the name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can’t enter into short positions as one of their primary goals).

Hedge funds more or less use dozens of different strategies, so it isn’t accurate to say that hedge funds just hedge risk. In other words, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.

  1. Precious metals

Gold and silver are indeed real assets with limited supply, even in year 2022. Their values are not related to long term cash flows like financial assets and are more stable. Precious metals are regarded as safe haven assets and their value often appreciates when stock prices fall.

More importantly they reduce portfolio volatility over the long term. But since the demand for these kinds of commodities often increases during recessions, their prices usually go up, making them good and safe investment ideas.

Investing during a recession can be stressful without a plan. But, investing during a recession can be a lot easier and even profitable with a well-diversified portfolio and a few tactical changes. Do your homework before investing, even in relatively stable stocks, funds, and other investment vehicles. And if a recession does hit and your investments drop, think twice before panic-selling.