The Best Assets To Invest In During A Recession

A recession is a normal (some might argue), inevitable part of the economic cycle. Many factors influence the dynamics of one, such as decreased consumer spending, a rise in unemployment rates, lower wages, and declining GDP.  

With the economic instability and uncertainty that comes with a recession, one may question whether or not investing during such a time is a good idea. It is fair to assume that holding on to every dollar earned would be the wiser choice. However, with a well-measured and sensible approach, investing during an economic downturn can provide an excellent opportunity for long-term gains.

If you’re interested in keeping your portfolio alive amid a recession, here are a few things to consider before investing and some of the best assets to protect your money.

What to Consider Before Investing During a Recession

When facing a declining economy, investors should act cautiously but also remain vigilant by monitoring the marketplace for potential opportunities. There are a few key questions that you should ask yourself before deciding to invest. 

What is your current financial position? 

Don’t compromise your current financial security for long-term gain. In other words, only invest what you can comfortably afford.

Are you able to take a long-term approach to investing? 

Investing during a recession does come with more challenges and risks. Be prepared to let your investments sit for at least 5-10 years before selling them. 

What is your risk tolerance? 

During a recession, frequent fluctuations in a portfolio are common. When the market takes a nose dive, will you be able to keep your cool and wait it out? 

The Best Investment Options During a Recession

Deciding what to invest in during a recession depends on your goals. What do you wish to accomplish with your investments? Whether you want to minimize the risk of loss, create a fixed income, capitalize on low-cost stock options, or maximize long-term returns—a clear understanding of your goals will help you choose an optimal investment option.

If real estate is your preferred investment vehicle, you’ll need to know how to play safe during a recession. The real estate market has been considered an attractive investment during past recessions, but it can be tricky to navigate. The pandemic greatly impacted the real estate market, causing supply issues, rising home values, and super-high buyer demand. Now, interest rate hikes have started to lower the price of homes but increase the cost of borrowing. This turn of events has had a negative impact on affordability, which has made many buyers pause on purchasing at this time. With the seller’s market ending, it is an ideal time for real estate investors to pick up properties as prices and competition come down. Here are a few of the best options to invest in during a recession.

Commercial real estate

While some industries are highly susceptible to economic cycles, other industries fare well regardless of the economy’s performance. Investing in commercial real estate using strategies such as triple net leases (NNN) is an excellent way to decrease the chance of taking a loss. Although no industry is entirely recession-proof, these commercial properties tend to maintain success even during economic downturns. 

Grocery Stores and Discount Retailers – People will always need to buy staple household items such as toothpaste, toilet paper & soap, even during a recession. Grocery stores and supermarkets such as Walmart, Costco, and Kroger are dependable investment options, especially when using a NNN lease. 

Healthcare – There will always be a need for health services. People with chronic conditions will still need their medication, and people will still get sick. Properties that are a good bet in a recession are medical offices (doctor’s offices, dentists, etc.) and pharmacies such as CVS Health and Walgreens.  

Death and Funeral Services – Death is an unavoidable part of life. As the popular saying goes, only two things are certain in life: death and taxes. Funeral homes, companies that provide caskets, and funeral-related services are relatively safe recession-proof investment properties.

Manufacturing – Industrial properties such as alcohol manufacturing, wholesale distribution, construction, etc., are another recession-proof investment. Companies such as Anheuser Busch InBev SA, Heineken, and SouthernCarlson are all examples of single-tenant flex industrial properties. 

Residential real estate

In general, residential properties will begin to fall, and as sellers become more worried about not being able to sell their properties, the more leverage you have to negotiate. Single-family, multifamily, and other pieces of property will all be opportunities for you to take advantage of during a recession. However, it’s still best to keep these assets in the long term, as it’s likely you’ll need to ride out the recession. Therefore, flipping might not be your best bet.

Stocks/bonds

In most recessions, you can buy stocks at a lower price. Generally, the best way to approach stocks is with a buy-and-hold strategy and then dollar-cost average over time. Recessions offer the opportunity to lower your dollar-cost average and acquire more shares for less.

Bonds, on the other hand, are considered the safest investments in the world because the U.S. Treasury guarantees them. You need to be careful with bonds since the best ones have maturity dates that tend to be long-term, such as 10-30 years, but will offer predictable returns. You also need to be aware of the inflationary pressures that can affect the strength of your bond yields. During recessions, bond yields rise, so be sure to take advantage of them.

Investment Strategies to Avoid During a Recession

While picking the right opportunities to invest during a recession is important, avoiding certain behaviors can be just as important.  

Timing dips in the market 

Trying to time the lowest dip in the market is like trying to predict tomorrow’s lottery numbers. It’s important to keep an eye on the market, but don’t wait around hoping prices will substantially drop before you make a move, or you may miss out on prime real estate.

Don’t try to do a quick, cheap flip

Flipping houses as an investment strategy is risky, especially if you don’t have the cash flow to flip the house properly. Cutting corners won’t get you as much ROI as you think, especially during a recession. Investing long-term is a much more reliable way to earn a greater return. 

Ditching assets too soon 

The market typically becomes volatile during a recession. Unloading your investments when the market dips could ultimately hurt your long-term growth by selling at a loss instead of waiting for the market to recover. 

Not focusing on business trends 

It is common to see a few business closures during a recession, especially with smaller companies that were struggling beforehand. However, even prominent brand names and anchor corporations can face bankruptcy and closures. Make sure to keep an eye on business trends when investing in property. If you see a company struggling, it would be wise to hold off until they are in a more stable place. 

Failing to diversify

We’ve all heard the term, “don’t put all your eggs in one basket,” and this is especially true in the case of a recession. Diversifying your portfolio can help increase your ROI or at least mitigate losses in your portfolio. If you’ve previously stuck with single-family homes, branch out to multifamily and commercial properties. If you take a loss in one area, you still have the others to help keep your cash flow afloat. 

Don’t Let a Recession Scare You From Investing

Recessions can be nerve-racking because we’ve all heard the horror stories. However, understanding your options and making wise decisions during a recession can help you avoid major losses and potentially lead to significant gains.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.