- One of the safest places to put your money during a recession is in bonds.
- Dividend-paying stocks offer a steady stream of income that can help offset other losses during recessions.
- Diversifying your portfolio can protect your portfolio against shifting market conditions.
Some investments are better than others in a recession.
No one likes to think about a recession. But the fact is, recessions are a natural part of the economic cycle, and they're going to happen whether we like it or not. The good news is that there are steps you can take to protect your portfolio -- and even grow your wealth -- during a recession. Here are some of the best places to invest your money if you think a recession is on the horizon.
RELATED: Best Financial Literacy Apps
U.S. Treasury and savings bonds
One of the safest places you can put your money during a recession is in Treasury bonds. Treasury and savings bonds are issued by the U.S. government and are backed by the full faith and credit of the U.S. government. That means they're about as safe as investments come. And because they're so safe, they tend to do well during periods of economic uncertainty.
I bonds are a type of savings bond offered by the United States government. I bonds are intended to provide a safe, low-risk investment option for individuals. I bonds earn interest for up to 30 years, that interest is exempt from state and local taxes, and it's even tax-deferred until you take a withdrawal. Currently, they are paying out close to 10%! Not bad for an investment with little risk.
Investment-grade corporate bonds
Investment-grade corporate bonds are another safe investment during a recession. These bonds are issued by companies with strong credit ratings, which means there's lower risk that the company will default on its debt payments. As with Treasury bonds, investment-grade corporate bonds tend to hold their value during periods of economic turmoil.
Since 2020, corporate balance sheets have strengthened, and according to Goldman Sachs, companies are at their lowest debt levels since the pandemic economic crisis. Companies that survived the pandemic are stronger, so many experts believe that the sector looks healthy.
Dividend-paying stocks can also be a good choice during a recession. When stock values are falling, dividend-paying stocks can offer a steady stream of income that can help offset other losses during recessions. Experts also believe that stocks with high dividend yields act as "bond proxies," providing some protection against downturns in the stock market and large increases in interest rates.
In most recessions since 1940, stock dividends have been stable, helping ease some of the pain as stocks tend to go down during recessions. Companies that pay dividends during a recession tend to be less risky to invest in, since their financials tend to be more stable. Dividend stocks offer a double bonus: a level of income and total return.
At a time when the economy is in recession, it is essential to diversify your portfolio. During a recession, stocks tend to be volatile. By maintaining a diverse portfolio, however, you can mitigate the effects of sharp price fluctuations. For example, by holding investments across multiple sectors and asset classes, you can help ensure that at least some of your portfolio is protected against shifting market conditions.
In addition, by allocating some of your resources to alternative investments like real estate or precious metals, you can further reduce risk by adding additional sources of return potential. Portfolio diversification is an important strategy for protecting your portfolio during times of recessions.
No one likes to think about recessions, but they're a natural part of the economic cycle, and they're going to happen whether we like it or not. If you're worried about a recession, there are steps you can take to protect your portfolio. Investing in bonds, dividend-paying stocks, and diversifying your portfolio are all good choices during periods of economic turmoil. So, if you think a recession is coming, look at putting your money in these safe investments and ride out the storm!
Our picks for 2024's best credit cards
Our experts carefully review the most popular offers and select those that are worthy of a spot in your wallet. These standout cards come with fantastic benefits like generous sign-up bonuses, long 0% intro APR periods, and robust rewards.
Click here to learn more about our recommended credit cards
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2024 The Ascent. All rights reserved.