Have you ever thought it might be possible to thrive individually in a down economy? When times get tough in the U.S. markets, the large majority of people get hit hard as well. This can be a result of ill-advised investment strategies, like putting all of your eggs in one basket. Not diversifying correctly can crush a 401k fund in a matter of days. Mixing in some recession-proof investments to your overall portfolio can help prevent the ship from sinking.
Many of the popular funds that people put their money into are tied to the overall equity markets. For us to do well as investors, we bet on the funds we put our cash into rising over time. We bank on the fact that long-term, equity markets have continued to rise. When the opposite happens, it’s common for undiversified investors to, lose a lot quickly, panic sell and end up in a worse position than if they had kept holding on.
We want to do everything in our power to prevent a recession from taking a chunk of our hard-earned savings. Let’s have a look at some of the most popular and effective recession-proof investments.
What Causes a Recession?
This question might come across as clickbait because the overall cause of recessions can’t be quantified in a paragraph. I do want to point out, however, that there are two main types of recessions (broadly speaking). We’ve got (A) the historical recessions caused by a specific series of events:
- 2007-2008 recession – The subprime mortgage crisis was the spark that burnt down the global economy.
We’ve also got (B) recessions caused by the up and down nature of the stock market. Things simply don’t rise forever:
- 1990-1991 recession – A result of the Federal Reserve raising interest rates, overall a “cyclical” event.
The current “bull market” the U.S. is experiencing has been around for over nine years. This is the second oldest bull market ever and underscores the increasing chance of a cyclical recession. Whether a specific factor causes stocks to drop or not, we’ve got options to protect our nest egg. Now to actually explore a few recession-proof investment ideas.
Aim for Low Volatility
Stocks that remain steady in turbulent times are both a gift and a curse to your portfolio. In booming economies, the returns will be much less than the high-growth options out there, but “low-vol” options also drop much less in a rough economy. When the markets plummeted in the early 2000’s .com bust, major markets like the NASDAQ and DOW lost double-digit percentages of their overall value. Low-vol stocks, on the other hand, rose an average of 6% over the same time period!
Similar to high growth ETF‘s that we have mentioned before on Home At 30, there are ETF options for low-vol as well. This takes the guesswork off your plate of picking individual stocks that are deemed to have low volatility. For example, USMV is the iShares low-vol index that historically has dropped less than the S&P 500 in recessionary economic times. Definitely take a look at all your low volatility options when picking an overall market strategy!
Putting your money in the hands of the government via bonds is another low reward strategy that also limits your downside risk when stocks are tanking. Part of the reason stocks are being hit as hard as they have the last few months is because of rising interest rates from the Federal Reserve. This creates a tightening of the overall economy, and it also makes bond investing more strategic and challenging. Nevertheless, options are still out there to hedge your exposure to big equity stocks that are taking huge losses.
In times of rising interest like we have today, short-term bonds are more preferable to long-term. This is because we’d rather tie up our money for two years instead of 10 if we think rates will be going up. Why keep your money locked into a low rate for longer if you could be getting it back and re-investing for a higher return?
Short-term government bond funds are plentiful out there, and I’d advise doing your research on the different options based on how aggressive/conservative you are with your overall approach. Vanguard has the VGSH and Barclays has the SHM for municipals, to name a few.
Gold! (and other Precious Metals)
Probably one of the most polarizing topics in the world of investments is precious metals and when it makes sense to invest in them. The major proof-point that advocates of investing in gold point to is the December 2007-May 2009 time frame. U.S. equity markets dropped around 37% as the housing crisis crushed the U.S. and global economies. What happened to the price of gold, you might ask? It ended up rising 24% over the same time period.
Unlike the fiat currencies of the world, the gold supply isn’t controlled by a snap of the fingers from the Federal Reserve. We can’t plug a printing press into the wall and magically create more gold. The supply of precious metals worldwide is controlled by the activity of mining companies, and there’s only so much of it on this planet. Investing in gold and other metals is a play on the long game and finite worldwide supply, but also a safe haven when the traditional stores of value (cash and stocks) start to go haywire in a recession.
Like low-vol and government bonds, there are funds available which track the price of gold, silver, platinum, you name it. SPDR Gold Trust (GLD) and iShares (IAU) are two of the more popular choices out there.
Recession-Proof Investments – Think Smart and Think Ahead
It’s important to keep in mind that even in tough times, the sun still comes up in the morning. Thinking long-term and realizing that markets have always bounced back can provide a much-needed morale boost. That being said, it’s still a great idea to have diversification in our money. Understanding some of the ways to preserve wealth in a short-term downturn is crucial to keeping yourself in good financial standing long-term.
Today we covered low-volatility options in the equity market, government bond funds, and precious metals. Each of these strategies could have their own articles and I’ve only scratched the surface today. Hopefully, this helps you think out of the box in terms of managing your hard-earned money in times of economic recession. We work so hard to spend and earn wisely; let’s figure out how to save wisely too!
All opinions expressed on this blog are solely those of Home at 30 and are in no way affiliated with any other organization or institution. The purpose of this blog is to give general education and information about investing, wealth, careers, and college; It is not intended to be professional advice.
Author: Joe Savoia
Joe is a 2014 graduate of Northeastern University and currently works in a field sales role for technology company Acquia. He has worked internationally as one of Acquia’s earliest Australia-based employees and helped in the early stages to develop that region. Today Joe is based out of Boston and lives in Somerville, MA. Joe’s primary interests vary widely, including everything from robotics/AI to finance, blockchain, and the rapidly evolving world of tech we live in.