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11 Recession-Proof Stocks & Investments That Protect You From Downturns

Are you worried about a recession wreaking havoc on your portfolio?

No company or sector is completely immune to recessions, yet some do far better than others during periods of upheaval.

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If the specter of an upcoming recession spooks you, then forget about high-volatility equities such as penny stocks. Even solid blue chip stocks often take a nosedive during recessions.

Instead, start looking into recession-proof – or at least recession-resistant – investments that can reduce risk in your portfolio and emerge from the storm even stronger.

Reasons to Choose Recession-Proof Investments

Some investors simply can’t stomach watching their investment portfolios dive by 25%. Even when they have decades to go before their retirement and have nothing to fear from sequence of returns risk, the thought of their portfolios losing money leaves them lying awake at night. If that sounds like you, no amount of data about stock market corrections can change your temperament. For that matter, no amount of higher returns can pay for your lost hours of sleep.

Beyond those who can’t handle a downturn emotionally, other investors can’t handle downturns financially. A new retiree vulnerable to sequence of returns risk may need to return to work if their portfolio drops by 25%.

That’s why all investors must assess their own risk tolerance. It varies based on your goals, age, finances, and investing temperament. Of course, even investors with a high risk tolerance often shift funds to defensive, recession-proof investments if they see the writing on the wall for the economy.

Best Recession-Proof Investments to Consider

So what do you invest in if you worry a recession looms around the corner?

You could leave your money in cash, of course, but then you don’t risk a loss; you guarantee a loss to inflation. Often the fear of losing money is exactly what causes you to lose the most money.

Many of the options below are considered defensive investments, while others are simply less likely to drop during a recession. All should be thoroughly scrutinized before you buy.

Keep in mind that assets change in value based on what people are willing to pay for them, rather than on any underlying fundamentals. A company’s stock price can dip even as they continue earning strong profits through a recession.

Without further ado, here are 11 investments to consider if you fear that a recessionary bear market lurks nearby.

1. Health Care Stocks & Funds

Regardless of whether the economy shrinks or grows, people still get sick and injured. Diabetes doesn’t go away at a specific GDP contraction rate.

Granted, 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.

Look at Johnson & Johnson during the Great Recession. From the beginning of 2008 through the end of 2010, their share price dipped by around 7%. Over that three-year period, the company continued paying out dividends, averaging about 3% yield annually. Even with the dip in price, an investor would still have come out ahead given the dividend yield.

Under the umbrella of the health care industry fall hospitals, day surgery centers, 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.

Example Fund: FHLC – Fidelity MSCI Health Care Index ETF (Expense ratio: 0.084%)


2. Utility Stocks & Funds

The same logic applies to utilities. People still need electricity, even when the economy shrinks.

In fact, there’s even less wiggle room with utilities than there is with health care. Sure, 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. These tend to be steady income-producing stocks, rather than erratic growth-oriented stocks. They’re steady to the point of being downright boring.

Example Fund: VPU – Vanguard Utilities Index Fund ETF (Expense Ratio: 0.10%)


3. Military & Defense Contractors

Say what you will about the military industrial complex, but it’s the ultimate survivor. Other types of subsidies come and go with the politicians in office, but the military industrial complex is a machine that rarely slows.

No political candidate of any party will ever say “You know what I believe in? A weaker military that can’t protect us.” Or, for that matter: “We need more fiscal responsibility in the military. Our service members’ lives are only worth so much, after all.” It’s just not politically expedient.

So 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.

Example Fund: XAR – SPDR S&P Aerospace & Defense ETF (Expense ratio: 0.35%)


4. Low-Cost Retailers & Chains

People may stop buying clothes at Armani during recessions, but they don’t stop buying clothes at Walmart. In fact, they suddenly start flocking to discount retailers for more of their needs. During the Great Recession, Walmart’s sales went 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.

Think about 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 behavior. But eating at Red Lobster instead of the upscale seafood restaurant across the street? That’s an easy shift.

Look low-end for recessionary winners.

Example Funds: Why complicate it? Just buy Walmart stock (WMT). Side effects may include feelings of guilt for supporting the world’s largest retail conglomerate, in which case, you may want to consider Costco (COST) or Kroger (KR) instead.


5. Tobacco & Low-Cost Alcohol Stocks

If you’re a nonsmoker like myself, you may try to apply the cold light of logic to this phenomenon. After all, tobacco and alcohol are discretionary expenses, and discretionary expenses should 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. Consider the tobacco company Altria. From late 2007 to late 2010, their stock returned a monstrous 28%, even as most stocks tumbled in freefall.

But be careful 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. It wasn’t a coincidence that Pabst Blue Ribbon suddenly became cool again among hipsters during the Great Recession.

Example Funds: Rather than broad exposure through a fund, consider picking individual tobacco or low-end alcohol stocks, such as Altria (MO), Philip Morris (PM), or Molson Coors Brewing Company (TAP). If you want to save even more money, quit smoking and give up drinking to live 14 years longer.


6. Low-Volatility Funds

At the risk of stating the obvious, volatility is a measure of risk, and low-volatility funds are specifically designed to fluctuate less with the mood of the market. They also tend to have lower returns, but hey, that’s what you get when you aim for low risk.

Often, 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.

When you want to get defensive, go low-volatility.

Example Funds: USMV – iShares Edge MSCI Minimum Volatility USA ETF (Expense ratio: 0.15%) for U.S. stocks only; VMVFX – Vanguard Global Minimum Volatility Fund (Expense ratio: 0.23%) for both U.S. and international stocks.


7. High-Dividend Stocks & Funds

For some stocks and funds, the primary returns lie in 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 banks lower interest rates, lowering new bond yields.

But be careful about chasing companies solely based on dividend yield; sometimes companies try to lure investors with high dividends to distract from their poor fundamental health. Before investing for dividends, learn how to analyze stocks with high dividends based on their dividend payout ratio.

Example Fund: VHDYX – Vanguard High Dividend Yield Index Fund Investor Shares (Expense ratio: 0.14%)


8. High-Quality Companies With Strong Balance Sheets

Fundamentally strong companies aren’t going anywhere, even during a recession. But how do you identify a strong company versus a vulnerable company?

Learn how to use fundamental analysis to evaluate companies. It forces 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. Their overleveraged competitors cannot, which means that if a recession hits, strong companies tend to emerge even stronger with a greater market share.

Example Fund: SPHQ – PowerShares S&P 500 Quality Portfolio (Expense ratio: 0.15% net)


9. Treasury Bonds

No list of recession-proof investments would be complete without U.S. Treasury bonds. Uncle Sam always pays up; he just doesn’t pay well.

Keep in mind that in a recession, the Federal Reserve tends to lower interest rates. As interest rates drop, so do bond yields, which means that bond prices go up. That serves you just fine as a holder of higher-yield bonds bought pre-recession.

If none of that made any sense to you, read this overview of bond investing for a quick introduction.

Finally, remember that you have several options for investing in Treasury bonds. One option is Treasury Inflation-Protected Securities (TIPS), and another is bond mutual funds.

Example Funds: FNBGX – Fidelity Long-Term Treasury Bond Index Fund (Expense ratio: 0.03%), or go straight to the source and buy bonds from the U.S. Treasury Department.


10. Commodities

When the economy bombs, everyone dives for the cover of precious metals such as gold and silver. They’re the ultimate defensive investment as the most literal definition of the expression “the gold standard.”

Granted, no one thinks about them much when the economy hums along healthily. Do your homework before investing in gold or any other precious metal.

And precious metals aren’t the only commodities available to buy. You can also invest in food, oil, and countless other commodities, many of which are staples of modern life. Do people eat less corn during a recession? Of course not.

Investing in commodities such as corn may not be sexy, but no defensive investment is particularly sexy or exciting. Pundits may gush over high-growth tech startups when the economy is strong, but those shooting-star investments are often the first to fall during a recession.

Just remember that not all commodities inherently do well during recessions, unlike precious metals. Here’s what you need to know before investing in commodities if you’re new to it, and as always, remember to diversify.

Example Fund: DBC – Invesco DB Commodity Index Tracking Fund (Expense ratio: 0.85%)


11. Rental Properties

All right, I take back what I said about recession-proof investments never being sexy. There’s an exception to every rule, after all.

Rental properties offer ongoing passive income, predictable returns, tax benefits, protection against inflation, and long-term appreciation potential. They also offer protection against recessions. People still need a place to live, even during downturns. While home values can drop, sometimes spectacularly, rents rarely drop by more than a few percentage points.

Consider the housing crisis during the Great Recession. Nationwide, the Case Shiller Home Price Index dropped by 27.42%, according to the Federal Reserve. Yet median rents did not drop, according to the U.S. Census Bureau; instead, they simply rose slower than inflation for several years.

Why? Because during recessions and housing contractions, homeowners often become renters. Even as incomes stagnate, demand rises for rental housing.

You can forecast rental cash flow and returns because you know the market rent and your expenses. You also know that, unlike home values or stock prices, that market rent won’t fall by 27%. Even in the worst recession and housing downturn in living memory, rents didn’t fall.

Still, being a landlord isn’t for everyone. Be sure to understand these considerations before renting out your first property.

Example: To explore rental property returns nationwide, check out Roofstock. They include a wealth of market and return data for each property and offer two outstanding guarantees.


Final Word

Not all companies and sectors take a hit during recessions. In fact, some even thrive as investors panic and look for safer places for their money.

But the greatest way to defend against losses isn’t one secret investment; it’s knowledge and due diligence. The more you know about investing and about any particular investment, the less likely you are to lose money.

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. Fundamentally sound companies and other investments usually emerge stronger than ever after the dust settles.

What have your experiences been with investing before, during, and after recessions? How do you plan on protecting yourself from future recessions?

G. Brian Davis
G. Brian Davis is a real estate investor, personal finance writer, and travel addict mildly obsessed with FIRE. He spends nine months of the year in Abu Dhabi, and splits the rest of the year between his hometown of Baltimore and traveling the world.

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