How To Survive A Recession (And Prosper When It's Over)

You've probably been hearing the term recession with increasing frequency. From stock market volatility to July 2024's concerning U.S. jobs report, fear surrounding the possibility of an economic recession is up. This fear (as captured by Wall Street's "fear gauge") can cause emotional and rash investment decisions, leading to massive sell-offs and even stock market crashes, which, in turn, can lead to even more financial trouble than the initial indicators that caused the fear in the first place. While one of the key things investors should avoid when it comes to downturns is panic selling, there's also a lot to know about weathering a full recession long term.

Beyond avoiding the panic selling of your assets, it's important to also remember that a recession doesn't mean you're powerless to manage your money. Even if your portfolio is damaged by massive sell-offs or crashes, there are investment strategies you can use to help not only weather a recession but also ensure your financial success during the inevitable recovery and rebound periods.

While you should definitely consider a more conservative approach (especially to any new and/or risky investments), there are some financial strategies worth considering that could mark a different approach than what you're used to, as positioning your portfolio for a strong recession rebound is fundamentally different from maintaining or growing investments during economic upswings. Let's next dive into the best ways to take advantage of an economic downturn, along with ways to set yourself up for success on the other side of rebound and recovery.

While recessions increase financial risk for consumers through riskier investments and economic factors such as higher unemployment rates (see our guide on recession red flags), they can also serve as potentially key times for certain kinds of investments. More specifically, dollar-cost averaging. Dollar-cost averaging means investing the exact same amount of money (in regular intervals) into a specific security regardless of the price (think of retirement contributions). This serves to not only lower the average cost per share but also helps to mitigate the volatility of a declining market.

This is because, as the share price drops, your normal monetary contribution can purchase an increasing number of shares so that when the price eventually rebounds, your average cost will be lower than the new share price. Plus this strategy has the added bonus of removing the effort and anxiety involved in trying to guess the right timing for market purchases. Keep in mind that this approach is best suited for long-term investors who aren't concerned with tracking the constant performance of their investments.

Another important thing to keep in mind is that, generally speaking, the market will bottom out before the end of the recession. This means you can utilize the timing of a downturn to increase your retirement contributions or even start your own separate dollar-cost averaging strategy accounts. This said, the potential for economic hardship is higher during a recession so don't over-exert yourself financially or dip into your savings in order to over-prioritize investing.

Recessions have historically been followed by a strong rebound period for the stock market. This means it can pay to set yourself up for success in the recovery portion by planning ahead. A big way to ensure financial stability is to invest in consumer staple companies; that is, those that manufacture, distribute, and sell the basic everyday goods people need. Not only do these companies outperform the S&P 500 during recessionary periods, but they also prove a more stable investment since people will always need the products (food, household products, medical supplies, etc.) the companies in this sector provide (even in the face of long-term downturns like bear markets). Note that these stocks are commonly referred to as consumer defensive stocks for their resiliency.

Another potential option, however, is to hold stock in established, large-cap companies (that have strong balance sheets and cash flow) since they're more likely to better weather a financial storm. As well, these companies are more likely to pay out dividends, ensuring a better chance of ROI despite economic hardship.

Investors also often turn to more conservative options like bonds during recessions. Both bonds and mutual funds can be "safer" choices than more risky investment options, but it's important to keep in mind that financial risk is going to be higher during a recession no matter what. It's also important to realize that recessions are a natural part of the financial world, and so making sure your risk aversion matches your particular portfolio is the key to being comfortable with your financial and investment decisions.