3 Funds for a Recession

Recessions are hard to predict. While they are sometimes the product of slow-moving trends, they can also be caused by a shock such as the financial crisis or a pandemic. And keep in mind, the markets are pricing in their best guesses of when a recession will hit, so it doesn’t make too much sense to overhaul your portfolio just because you think a recession is on the way.

On the other hand, it doesn’t hurt to have some defensive investments in your portfolio that will help you to weather a downturn. Here are three ideas for this.

Funds for a Recession

These funds earn a Morningstar Analyst Rating of Gold and Silver.

1. Vanguard Long-term Bond Index VBLLX

2. Vanguard Global Wellesley Income VGWIX

First off, there’s humble money market fund. These days they have a decent yield, so they don’t hurt so much to park money there. But also, remember people lose jobs in recessions and it’s a good idea to have a healthy cash stake of at least six months’ spending needs to cover things like mortgage, food, utilities—all those basics—in case you do lose a job.

Second, high-quality long-term bond funds. A recession usually triggers a drop in inflation and a drop in interest rates. Long-term government and other high-quality bond funds usually rally in these circumstances. Thus, a fund like Vanguard Long-Term Bond Index VBLLX should thrive in such an environment. The downside here is that these are also the sort of funds that get crushed when interest rates rise. Check out the fund’s losses in 2022 for proof.

Third is Silver-rated Vanguard Global Wellesley Income VGWIX. This fund might lose money in a recession but probably not too much. It invests in value stocks from around the world and bonds from around the world. Most of the portfolio is in bonds, and that should help the fund hold up in a recession. This extreme diversification can help the fund to reduce losses because recessions typically hit specific sectors and specific countries hard but others not so much. In the end, that should help the fund to emerge relatively unscathed.

Watch “3 Great Funds for Your IRA in 2023″ for more from Russ Kinnel.