Guide to Money Management and Investing During a Recession

Layoffs. Rising interest rates. Grocery bills that keep climbing higher. During a recession, the economy experiences a decline in growth, production and employment. The value of assets like stocks and real estate often fall as well.

With many financial pitfalls to navigate, do you know where to put money during a recession? Understanding the right saving and investing strategies to pursue during a recession can help you survive and thrive thanks to new financial opportunities.

• Money Management Strategies
• What to Establish Before Investing
• What to Invest in During a Crisis
• Investing Approaches During Recessions

A recession involves a decline in economic activity lasting a few months to several years. Instead of panicking, remember that “cash is king” and to have enough in emergency savings to guard against possible unemployment. Since cash loses buying power over time due to inflation, a high-yield savings account is a great place to put your savings.

If you are in debt, balance paying it off with growing your savings to avoid going deeper into debt. You should also review your budget to find ways to trim your expenses. If you lose your job, apply for unemployment insurance right away to reduce the need to tap into your savings.

Many experts think recessions present an opportunity for investing. But how do you know if it’s the right move for you? Once you create a solid emergency fund and pay off debts like credit card debt, investing could be a wise decision. It’s important to wait until you establish these things before increasing the amount of money you invest.

You should also continue contributing to company-sponsored retirement plans to receive the company match. Ongoing investments also take advantage of dollar-cost averaging to buy shares at lower prices during a recession. Certified financial planner Jill Fopiano shares, “Having the discipline to stay invested throughout market cycles usually leads to the best result.”

While no investment is guaranteed to be recession-proof, looking at investments that have weathered economic storms previously can offer lessons for the future. Implementing wise investing strategies can also be important.

Investing during a recession should be approached with careful consideration. Investors need to think about their short and long-term financial goals. It might be wise to avoid industries catering to wants as opposed to needs since discretionary spending tends to decline in economic downturns.

Fixed-income investments help preserve capital and are less risky than stocks. Government bonds, money markets and certificates of deposit (CDs) are examples of these investments. They can be purchased from banks, brokerage firms or government websites.

During a recession, fixed-income investments offer guaranteed returns matching the interest rates offered on the investment. Bond issuers might default on repayment if the issuer has financial problems.

A bond is basically a loan a consumer is making to a corporation or the government. They are best for those who are closer to retirement or are risk-averse. During recessions, bonds have outperformed stocks and cash because bond values increase as interest rates decline.

Most investors hold bonds for a duration of one to ten years. Currently (May 2023), short-term bonds are yielding more than mid and long-term bonds, which is a historical indication of a pending recession. Private bonds tend to offer higher interest rates than government bonds since their risk level is higher.

This chart shows the monthly trend of ten year treasury bond rates in the United States from May 2013 to June 2022.

Since Treasury Bills are backed by the U.S. government, they offer a guaranteed return on investment. Interest is paid when the bill matures, and you can invest up to $10 million dollars. During a recession, they are attractive to investors as a low-risk investment that provides guaranteed income and repayment. You can purchase them from Treasury Direct.

Money market funds are a type of mutual fund and can include low-risk investments like U.S. Treasury securities, certificates of deposits (CDs) or cash. They are best for those looking for temporary places to park cash since they are easily bought and sold. During a recession, they are good for protecting assets since they are relatively safe.

Interest rates are generally slightly higher than bank savings accounts but can be impacted during a recession.

The risks of money market funds are that long-term growth opportunities are limited and interest rates may not keep pace with inflation.

CDs are bank accounts with guaranteed interest rates that are generally higher than those offered by savings accounts. They are ideal for those who are risk-averse. However, they do not allow withdrawals during the term of the CD without charging a penalty .While this locks up money for a certain period of time, there isn’t a risk of losing money (up to FDIC insurance limits) with this investment vehicle during a recession.

CD laddering can also be attractive during recessions because it gives you access to money at certain intervals, making your investment slightly more liquid.

An equity is a share in a company, which is what investors receive when purchasing stocks. Some stocks pay dividends for recurring income, while growth stocks are expected to increase in value over time.

In a recession, equity prices are usually lower, so buying stocks during this time can be profitable in the long-term. Equities are also risky because of the unpredictability of the stock market.

This chart shows the performance of the S&P 500 since 1971. The S&P 500 is a stock market index that contains the top 500 companies with the highest market capitalization, weighted toward larger companies. The chart shows that, historically, there is a rebound following a decline.

Value stocks are equities being sold below their estimated value. These are usually companies with successful business models that have done well over time. Growth stocks are typically equities from newer and often innovative companies that may not yet have reached their full potential but whose value is expected to grow rapidly.

Value stocks generally present more predictable returns and may pay quarterly dividends. Growth stocks typically do not offer dividends and may present a risk if the company fails to perform.

During recessions, investors often choose value stocks for safety, which may mean that the price of growth stocks has declined. Growth stocks, therefore, present an attractive option for investors willing to accept more risk for long-term gains. Value stocks could be better for risk-averse investors.

Defensive stock investing is best for risk-averse investors and involves choosing stocks representing companies that offer products or services that people always need. Their value tends to rise slowly over time.

Aggressive investing chooses products that might be risky but present the chance of a quicker, more outsized return. These could include small-cap stocks, emerging markets or high-yield bonds that carry a risk of non-repayment. These strategies are typically better suited for younger investors or those with a long-term investing horizon.

During recessions, stocks that are part of a defensive investing strategy continue to do well because they represent companies making a good or service that consumers continue to buy throughout all stages of the economy.

Aggressive stock investing might be more appealing when the economy is on an upswing and investors are taking more risks on new products or emerging markets. But, if you can get a good deal on an aggressive stock during a recession, it could be lucrative.

The following sectors represent examples of stocks that could be part of a strategy of defensive investing.

Index funds are a type of mutual fund or exchange-traded fund (ETF) containing a portfolio of stocks modeled after one of the major stock market indexes, such as the S&P 500 or the NASDAQ 100. They simplify investing and minimize risk through diversification.

Buying individual stocks gets you ownership in a company. They are riskier but offer greater potential returns.

Individual stocks can be more appealing if the price has dropped substantially and you are looking for big returns. Index funds can be a better choice because you'll own a collection of stocks that reduce wild swings in the value of your investment.

In a recession, index funds are typically the better choice since you get diversification. You may also be able to get them on sale if the market takes a dive, allowing you greater profits over time.

During recessions, precious metals like gold or silver can serve as a hedge against inflation since they are viewed as a "store of value." Their value often rises with inflation and during periods of uncertainty.

While precious metals can provide diversification to your portfolio, they generally do not provide income to investors.

This chart shows the performance of the gold ETF SPDRF Gold Shares starting in 2004. Since the height of the pandemic in August 2020, gold has traded around the same high levels.

Real estate investments gain value through appreciation or by providing their owners with monthly income. Real estate can be a good investment since returns can be higher than the stock market. During a recession, real estate can be purchased at discount prices because the market tends to decline.

Investing in real estate is not for everyone. Sometimes it can involve managing property or taking out a loan. Even though it may require a significant amount of money to get started, investing in real estate during a recession can be lucrative if you have the funds.

This chart shows the median sales price of houses sold in the United States from 1963 to present. The 2008 recession resulted in a significant dip in prices, but the overall trend is that real estate prices have risen over time.

A recession is a normal part of the economic cycle. While no one can predict exactly how long a recession will last, it’s important to implement an investing strategy that accommodates uncertainty.

There are many investments that might make sense based on your situation. Investments carry varying amounts of risk, so it’s important to think about your goals, when you'll need the money, what you should invest in and how much you can invest.

Dollar-cost averaging involves investing consistent amounts of money over time in the markets. It balances out the cost you pay for equities and allows you to be a more disciplined investor.

During a recession, investors can consistently take advantage of falling asset prices. By investing as prices decrease, you'll buy more shares at a lower cost for the same amount of money. Continuing to invest using the dollar-cost averaging strategy during a downturn yields higher returns over the long-term.

Lump sum investing is when you invest a large sum of money all at once. During a recession, this can be a great strategy if you manage to invest when the market is at its lowest point. There is a higher level of risk involved because if you’re wrong, you may see negative returns in the short-term until the market rises again.

Fundamental analysis assesses the value of a stock based on publicly available performance reports and the current economy. If the asset is undervalued, investors will purchase it.

During a recession, many companies might be undervalued, making fundamental analysis helpful because it helps identify good buys. However, the stock market does not always perform in predictable ways, so the asset price might not increase according to predictions.

With technical analysis, investors study the past performance and movement of a stock based on price and volume to predict its future behavior. These patterns then allow them to determine when to buy or sell.

Technical analysis can be complicated to learn, time-consuming and does not consider a company’s fundamentals in deciding whether or not to buy the stock. It might not be the best strategy for those looking to make long-term investments.

Diversification involves buying stocks from different sized companies, industries and regions of the world. Owning only a small part of an industry or company that might fail protects investors from risk since if one company fails, other investments might make up for the loss. The downside is that you may miss out on bigger returns from companies that are highly successful.

Diversification can also refer not just to owning a diverse portfolio of stocks but also different types of investments, including fixed income investments.

There are many online resources available to help those who want to learn more about recessions, savings or investing. We’ve compiled a list of a few worth checking out.

• EDGAR Database: Published by the U.S. Securities and Exchange Commission, EDGAR is a database providing free public access to corporate information, such as quarterly and annual reports, as well as information provided by mutual funds.
• Federal Reserve: The Federal Reserve serves as the central bank for the U.S. It works to maintain the operation of the U.S. economy and is responsible for things like interest rate hikes.
• FINRA.ORG: The Financial Industry Regulatory Authority (FINRA) is a government-authorized nonprofit organization that conducts oversight of brokerages and other entities that sell securities to investors. Also contains a useful free education library for investors.
• First Generation Investors: Nonprofit that teaches high school students in underserved communities the power of investment.
• Girls Who Invest: Nonprofit that offers fully funded education programs in investment management.
• Investor.gov: Published by the SEC’s Office of Investor Education and Advocacy, this government website contains investment calculators, articles and other useful tools to help consumers make sound investment decisions.
• Operation Hope: Operation Hope promotes financial literacy in underserved communities.
• Treasury Direct: Official government website where investors can buy treasury bonds.
• U.S. Bureau of Labor Statistics: Provides insights into which industries are hiring and which might be experiencing layoffs or lags in employment.
• U.S. Department of Labor: Offers resources to help workers and unemployed people.
• Women’s Institute for Financial Education: Nonprofit organization dedicated to promoting financial education for women.