However, several options tend to perform well or offer protection during market downturns. U.S. Treasury securities, particularly long-term bonds, are often considered a safe haven during crashes because of their government backing and tendency to rise in value when stocks fall.
Seek Out Core Sector Stocks
If you want to insulate yourself during a recession partly with stocks, consider investing in the healthcare, utilities and consumer goods sectors. People are still going to spend money on medical care, household items, electricity and food, regardless of the state of the economy.
Gold might be the oldest and most universally accepted hedge against stock market crashes, inflation, currency devaluation, and general economic or geopolitical turmoil. Precious metals generally, and gold in particular, are seen not just as investable assets but as a true store of value in good times and bad.
Your investment is put into various asset options, including stocks. The value of those stocks is directly tied to the stock market's performance. This means that when the stock market is up, so is your investment, and vice versa. The odds are the value of your retirement savings may decline if the market crashes.
Bond funds, money market funds, index funds, stable value funds, and target-date funds are lower-risk options for your 401(k).
Money Market Funds
Ultra-conservative investors and unsophisticated investors often stash their cash in money market funds. While these funds provide a high degree of safety, they should only be used for short-term investment. There's no need to avoid equity funds when the economy is slowing.
Avoiding highly indebted companies, high-yield bonds and speculative investments will be important during a recession to ensure your portfolio is not exposed to unnecessary risk. Instead, it's better to focus on high-quality government securities, investment-grade bonds and companies with sound balance sheets.
Stocks and bonds have relatively low transaction costs, allow you to diversify more easily and leave your cash more liquid than real estate (although the stock market is typically more volatile than the housing market). Meanwhile, real estate is a hedge against inflation and has tax advantages.
In a recession, it's smart to preserve your capital by investing in safer assets, such as bonds, particularly government bonds, which can perform well during economic downturns.
Economist Claudia Sahm created a real-time indicator in 2019 that is used by many economists and. policymakers to identify whether the economy may be in a recession. The Sahm rule is triggered when the. three-month moving average of the unemployment rate increases by 0.5 percentage points or more.
Liquidity is crucial in uncertain times. “I've seen people struggle during a recession because their assets were too tied up in investments. This is why I suggest keeping some of your money in cash or in easily liquidated instruments like Treasury bills,” Kovar said.
Real estate is a great place to start as its value is unlikely to drop, but other investments like precious metals, commodities, other currencies, cryptocurrencies, and even self-sustaining practices can help you deal with the significant repercussions of inflation and a dollar collapse.
“The demand for travel and hospitality services typically declines as consumers cut back on discretionary spending,” Sarib Rehman, CEO of Flipcost, said. “To attract customers, airlines, hotels and travel agencies often lower their prices and offer more promotions.”
Treasurys, says Collins, are similar to government and corporate bonds, as they are backed by the full faith and credit of the U.S. government. They are typically seen as safe investments during a recession. "In times of market volatility, investors may flock toward Treasury bonds, seeking stability," he says.
The industries known to fare better during recessions are generally those that supply the population with essentials we can't live without. They include utilities, healthcare, consumer staples, and, in some pundits' opinions, maybe even technology.
Most professional traders move to cash or cash equivalents when there is real turbulence in the markets. Keep at least a small portion of your portfolio in guaranteed investments that won't fall with the markets.
“Holding cash during times of economic uncertainty, like a potential recession, can feel reassuring because it offers liquidity and a sense of control,” said Adam Paoli, the lead financial planner at Coltiva Wealth.
The reality is that stocks do have market risk, but even those of you close to retirement or retired should stay invested in stocks to some degree in order to benefit from the upside over time. If you're 65, you could have two decades or more of living ahead of you and you'll want that potential boost.
It's better to own broadly diversified mutual funds or index funds that track a broad basket of stocks, such as the S&P 500. The fixed-income portion of your portfolio, which consists of bonds, money markets, CDs, and other cash equivalents, will act as a downside buffer against a steep stock market decline.
At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).
Rebalance your portfolio
Along with setting long-term financial plans and helping ensure that your 401(k) is diversified, strategically rebalancing could help reduce your risk to market volatility.