Which Investments Do Best in a Recession?
History offers mixed data on safe havens.
Everyone seems to be worried about a possible recession these days. The specter of an economic slowdown has been hovering ever since the subprime-mortgage crisis erupted last year, after which falling home prices led to a reduction in consumer spending, or at least the expectation of one. The latest bad news came Feb. 5, when the Institute for Supply Management reported a sharp drop in nonmanufacturing business activity in January, leading some people to think that we may already be in a recession.
Whether or not we're in an official recession (defined as two consecutive quarters of negative growth in gross domestic product), most people agree that the U.S. economy is at least slowing down, and it's natural to wonder what you, as an investor, should do. This recent column by Annie Sorich gives some good advice, which can be summarized in two phrases: Don't panic, and be prepared. A down market is usually a better time to buy than to sell, and investing steadily through dollar-cost averaging is often your best bet. Also, it's a good idea to have some savings as a cushion and to have investments in your portfolio that won't be hurt too badly by an economic downturn.
But how are you supposed to know which investments will do well (or badly) in a recessionary environment? That's not always a simple question to answer, but some general guidelines can be helpful.
David Kathman does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.