Assets like stocks commonly tumble in a recession as people curb their spending, employees lose jobs and companies pull back on investing during market turbulence. Kavan Choksi points out that uncertainties associated with recession may even cause several investors to consider getting out of the game altogether. Many anxious investors see the stock market dipping and panic sell to cut their losses. However, they do not realize that doing so just locks in their losses. Instead of selling off investments that underperform during a recession, it is better to further diversify the portfolio with assets that hold up during a market downturn
Kavan Choksi briefly discusses certain recession-proof investments
Recession can cause quite an upheaval in the markets, and make everything more expensive, right from gas to groceries. However, just because the near-term economic picture is negative does not mean that one should stop saving and investing. Even though there is no investment that is entirely immune to an economic downturn, certain options have proven to be more resilient during difficult economic times over time:
- Commodities: Commodities basically imply to raw materials like grains and metals. They can be used on their own or as components of other products. Commodities are widely considered a potential hedge against inflation. There are multiple ways to invest in commodities, the simplest one is through a mutual fund that invests in businesses that are involved in commodities, Energy, agriculture and mining companies are great examples of such businesses.
- Pharmaceutical stocks: Being a subset of the healthcare industry, pharmaceutical stocks are considered to be a “defensive” investment instrument. After all, even in the midst of an economic crisis, people would still need medicines and have to get treated for illnesses. For instance, anyone on a blood pressure medication is unlikely to stop taking that when a recession comes, even if they have to find a new means to pay for it.
- High-yield savings account: Even though a high-yield savings account is not always a good long-term investment, putting money in it can be a good way to ride out uncertain economic times. A number of high-yield accounts still offer more than one may get in a normal checking or savings account. Hence, having adequate funds in these account would make sure that the money stays safe during a recession.
- Utility stocks: Much like pharmaceutical stocks, utility stocks also come under the defense category. Even as the consumers cut down their spending, they would still need electricity and water in their buildings. Moreover, utility stocks generally pay high and consistent dividends. This makes them more appealing to investors looking to explore defensive stock options.
According to Kavan Choksi, in addition to the options mentioned above, investing in precious metals can also be a good way to diversify and recession proof a portfolio. Precious metals like gold and silver are generally high in demand during stock market sell-offs as well as times of overall economic unease. The price of gold generally goes up during low-interest-rate environments. As gold does not pay a dividend, it becomes more attractive for investors when other instruments are not paying much income either.