Recessions are frightening for investors. Many individuals have recently been concerned about rising inflation, rising interest rates, and the stock market’s downturn. However, despite being scary, investing during a recession isn’t as troublesome as it looks.
Economic recessions can create increased market volatility, so it’s necessary to know the right places to invest that can help you preserve or even grow your wealth.
Here are five investments that are safe to own during an economic recession
1. Stock funds
Stock funds such as mutual funds or ETFs are a safer way to invest in the stock market during a recession. Instead of purchasing individual stocks, stock funds offer increased diversification and can allow individuals to spread their risk amongst a large variety of companies instead of a few stocks.
In the long term, a good stock fund can help you build your wealth despite any short-term fluctuations in the market.
Historically, markets have always recovered from a recession and have made their way back better than before, and investors that can survive the volatility during an economic recession can make it out the other side with promising high returns.
A well-diversified portfolio can minimize your overall risk and reduce the hassle of investing in individual stocks.
Stock funds based on a well-balanced index, such as the S&P 500, allow you to invest in all of the best companies without picking and choosing your favorites.
According to Forbes, some of the best stock funds to invest in 2023 include the Fidelity U.S. Sustainability Index Fund (FITLX) and the Vanguard Developed Markets Index Admiral (VTMGX).
2. Dividend stocks
If you’re already investing in a stock portfolio and want to reduce the effects of volatility during a recession, you can add dividend stocks to your portfolio.
Dividend stocks are shares that pay back a small portion of profits made to all investors in the form of dividends. Despite falling stock prices or volatility in the market, companies will generally try to preserve dividends for their investors. Furthermore, companies that pay dividends are generally mature businesses with consistently profitable earnings and solid balance sheets.
Instead of individually buying dividend stocks, you can invest directly in dividend stock funds. Like stock funds, these are more diversified and reduce the overall risk of investing in the market.
Several dividend funds you can invest in 2023 include the SPDR S&P Global Dividend ETF (WDIV) and the JPMorgan Diversified Return International Equity ETF (JPIN).
3. Bond Funds (Safer Than Stocks)
Bonds tend to be less volatile than stocks, and many investors look towards purchasing bonds in times of uncertainty to preserve their investment’s principal.
Bond funds are attractive to investors as they can diversify their portfolios and minimize the risk associated with holding individual bonds.
A Federal Bond fund is ideal for you if you want to invest with minimal risk. These funds invest solely in federal U.S. bonds, which are the safest overall as they have no default risk and are backed by the U.S. government. Highly rated bond funds typically have most of their investments in treasury bonds and the rest in corporate or municipal bonds.
Other bond funds may invest in lower-rated bonds or have a higher risk. However, despite having higher predicted returns, such investments may be riskier in times of recession.
According to Morningstar, the best bond funds you can invest in as of December 2022 are the American Funds Bond Fund of America (ABNFX) and Baird Aggregate Bond (BAGIX).
4. Large-cap Stocks (Safest)
Investments in individual stocks tend to be riskier than investments in a fund or a portfolio. However, if you insist on investing in individual stocks, the safest option is large-cap, blue-chip stocks during a recession.
Large-cap refers to big companies that are valued at over $10 Billion. These companies have a strong balance sheet, greater positive cash flows, and are generally less vulnerable to short-term volatility in the market, making them relatively safer than speculative companies or growth stocks with higher prices-to-earnings.
It’s also imperative to hold stocks in large companies that are less affected by changes in consumer preferences, such as companies in the healthcare industry or those providing consumer staples. These stocks function as defensive stocks and are safer investments during uncertain times.
Should You Invest During a Recession?
Investing during a recession is often an opportunity to buy assets at lower prices. However, it’s important to understand that hard times may require you to keep cash on hand or wait years to see a return on your investments. If you’re planning on investing during an economic downturn, always be prepared with a 3 to a 6-month emergency fund for a rainy day.
The bottom line is you need to be strong and patient to invest during a recession. You need a certain amount of determination and focus on the long term to help you survive the volatility in the market during such times. However, as long as you focus on the bigger picture and make investments that can support you as the market turns around.
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