Recession Guide → Investing During a Recession

Recessions are scary.
Your investments don’t have to be.

Most people freeze when markets drop. The ones who come out ahead are the ones who understood what was happening — and had a simple plan. Here is what you need to know.

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First, the basics

What actually happens to investments during a recession

When an economy contracts, stock markets usually fall. That is the part most people focus on. What gets less attention is that recessions are temporary — every single one in recorded history has ended, and markets have recovered. The question is not whether your investments will bounce back. The question is whether you will still be invested when they do.

The biggest financial mistake people make during a recession is selling out of fear and locking in losses. Staying the course — or better yet, continuing to invest — is what the data consistently supports over the long run.

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What tends to hold up

Asset types that historically perform better in downturns

Not all investments react the same way when the economy slows. Some categories have a track record of holding value better than others during recessions. None of these are guarantees — but understanding them helps you make more informed decisions.

• Defensive stocksCompanies in sectors like utilities, healthcare, and consumer staples tend to be more stable because people keep buying essentials regardless of the economy.
• Dividend-paying stocksCompanies that pay regular dividends provide income even when stock prices fall, which cushions the overall impact on your portfolio.
• Index fundsBroad market index funds spread your risk across hundreds of companies. They fall with the market, but they also recover with it — and their low fees mean more of your money stays invested.
• Bonds and bond fundsBonds often move in the opposite direction of stocks, making them a common tool for balancing a portfolio during volatile periods.
• Cash and high-yield savingsKeeping a portion of your money liquid gives you both security and the ability to invest when prices are low.

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The strategy that works

Dollar-cost averaging — the simplest recession investing approach

Dollar-cost averaging means investing a fixed amount of money at regular intervals — say, $100 every month — regardless of what the market is doing. When prices are high, your $100 buys fewer shares. When prices are low, it buys more.

During a recession, this strategy works in your favor. Lower prices mean your regular contributions buy more shares than they would in a healthy market. When the recovery comes, those extra shares increase in value. You do not need to time the market. You just need to keep showing up.

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Before you invest

Three things to get right first

Investing during a recession only makes sense if your financial foundation is stable. Before putting money into any investment platform, make sure these three things are in order.

• Emergency fundHave at least three months of living expenses in a liquid, accessible account before investing anything. This prevents you from having to sell investments at a loss in an emergency.
• No high-interest debtPaying off credit card debt at 20% interest is a guaranteed return. No investment can reliably beat that. Clear high-interest debt before adding to investments.
• Long time horizonRecession investing works best when you do not need the money for at least five years. Short-term money should not be in the stock market during a downturn.