Recession-Proof Cash Investments: Where To Park Your Money

The best investments during a recession may be surprising. Many investors make the mistake of becoming more conservative, but the best long-term strategy is to become more aggressive, increasing exposure to assets that may offer higher returns.

- Defensive stocks: These are stocks in non-cyclical sectors like utilities, consumer staples and healthcare. These sectors tend to be less sensitive to economic downturns as people continue to purchase essential goods and services.

- Large-cap stocks: Stocks of larger companies may perform better than smaller peers in an economic downturn as they are generally considered less volatile.

- Funds: Investing in funds such as exchange-traded funds (ETFs) and low-cost index funds can be less risky than investing in individual stocks.

- Dividend-yielding investments: Dividend stocks and fixed-income investments like bonds offer routine cash payments, which can be reassuring during recessions.

- Gold: Gold is often seen as a hedge against stock market volatility and can be a good investment during recessions.

- Real estate: During a recession, real estate prices may drop, creating opportunities for investors. Additionally, mortgage rates tend to be lower during recessions, making it an attractive time to lock in a favourable rate.

- Cash and cash equivalents: While this is not a long-term wealth-building strategy, having some cash on hand is always a good idea. Consider putting your money into a high-yield savings account or money market fund.

On the other hand, here are some investments to avoid during a recession:

- Bonds: While bonds can be a good investment during economic uncertainty, they are best purchased when interest rates are falling. In a recession, interest rates are likely to rise in the future, pushing bond prices down.

- Highly indebted companies: The stocks of highly indebted companies usually fall significantly before and during a recession as investors anticipate the risk presented by their debt.

- High-risk assets: Options and other high-risk assets are not suitable for recessions. The uncertainty surrounding a recession makes these investments even riskier.

Dividend-yielding investments

During a recession, investors tend to flock to dividend-yielding investments, such as dividend stocks, or fixed-income investments, such as bonds. Dividend stocks can provide a stable cash flow even during recessions, as long as the company has a strong track record of paying and increasing dividends.

When searching for dividend-paying stocks or dividend-paying ETFs, it is important to look for consistency in paying or increasing dividends, rather than focusing solely on yield. This is because the highest yields tend to come with additional risk. A strong track record of dividend payments is indicative of good corporate governance.

Another option is to invest in dividend ETFs, which are made up of companies known for routinely paying strong dividends. Dividend-yielding investments can also help to lower volatility. Even if the value of a stock is down, reinvesting the dividends can reduce the impact of the loss.

Dividend-yielding stocks can be a good place to put your money when markets are falling. They are less volatile than other stocks, as investors are more willing to hold on to these high-income stocks during a bear market.

However, it is important to remember that companies can start or stop paying dividends at any time, so it is not a risk-free strategy.

Defensive stocks

Some well-established companies that are considered defensive stocks include Procter & Gamble, Johnson & Johnson, Philip Morris International, and Coca-Cola. These companies have strong cash flows and stable operations, and they are able to weather weakening economic conditions.

High-yield savings accounts

Higher earnings than a regular savings account

Your money is shielded from losses

It serves as a cash reserve

Recessions can bring financial challenges, such as job loss and reduced income. A high-yield savings account can provide a valuable source of extra cash when you need it. These accounts typically allow for a certain number of withdrawals per month without penalty, making them more liquid than other financial products like CDs.

Keeping your savings liquid

It is important to keep your emergency fund in a high-yield savings account that provides easy access to your funds. While earning interest is a bonus, your primary goal should be to maintain liquidity and safeguard your money. Make sure to read the fine print when choosing an account, as some may have withdrawal restrictions or fees.

Shop around for the best rates

Some high-yield savings accounts offer interest rates that are more than 15 times the national average. It is worth comparing different lenders' offers to find the best rates and features that suit your needs.

Real estate

Advantages of Buying Real Estate During a Recession

During a recession, home values tend to fall, and you may find homeowners willing to lower their asking prices or banks selling foreclosed properties at discounted rates. This can be an opportunity to buy properties at bargain prices. Recessions also tend to bring falling mortgage rates, as governments try to stimulate the economy and housing market. This can make it cheaper to borrow money to invest in real estate.

Drawbacks and Challenges

However, buying real estate during a recession also comes with challenges. Some homes may be priced low due to needing repairs or renovations, and foreclosures or short sales can be risky and come with hidden costs. It's important to do your due diligence and be wary of potential issues. There may also be more competition for the best deals as other investors try to take advantage of the market.

Tips for Investing in Real Estate During a Recession

• Focus on cash flow: Invest in properties that generate positive cash flow, as this will help you weather the recession.
• Look for quality properties in high-demand areas: These properties are more likely to retain their value and generate stable income.
• Analyse properties carefully: Don't overpay, and only invest in properties that make sense financially.
• Maintain healthy cash reserves: Don't overextend yourself; ensure you have enough liquidity to cover expenses and potential vacancies during the downturn.
• Be patient: Don't panic and sell at the bottom of the market. Real estate values tend to recover over time, so be prepared to hold onto your investments until the market improves.
• Take advantage of opportunities: A recession may provide opportunities to score great deals on investment properties.

Final Thoughts

In conclusion, investing in real estate during a recession can be a smart move if you are cautious and strategic. Do your research, focus on cash flow and quality properties, and be prepared to hold your investments for the long term. By taking advantage of market opportunities, you can set yourself up for success when the economy recovers.

Large-cap stocks

However, if a recession is severe and leads to widespread market declines, even large-cap stocks that pay dividends may suffer.

If you're interested in investing in individual stocks during a recession, look for companies with low debt, profitability, strong balance sheets, and positive cash flow. These characteristics can help a company get through difficult economic times.

• Set the market capitalization to "large-cap" or larger.
• Set the price performance to show individual stocks that have outperformed the broader market.
• Choose common stock if you have the option to filter by security type.
• Select the sector, such as consumer staples or healthcare, which tend to be more resilient during economic downturns.

Remember that past performance doesn't guarantee future results, but these criteria can help inform your investment decisions.

Frequently asked questions