Legendary investor Warren Buffet once said that it’s wise for investors to be “fearful when others are greedy and greedy when others are fearful. There’s no better way to prove your bravery as an investor than continuing to buy through a recession.
Though it might seem drastic while it’s happening, it’s important to remember that recession is a natural part of the economic cycle. While it can be tempting to sell everything and “stop the bleeding” during an economic downturn, the truth is that the best thing you can do is continue to invest with a modified trading strategy.
Today, we’ll take a look at what to invest in during a recession to best protect your money.
Large-cap stocks are shares of a company with a total market capitalization of over $5 billion. These companies are some of the largest in the United States, and many large-cap corporations produce products that are considered household names. Visa, McDonald’s, and Verizon are all examples of large-cap stocks. Many large-cap stocks are considered to be “blue chip stocks,” reliable assets that tend to increase in value at a slow and steady rate.
Large-cap companies offer several benefits to investors during a recession, including:
- Less volatility — Large-cap companies are far from immune when recession hits. However, their major market capitalization and sheer size typically prevents them from making major price movements when prices decline. You’ll usually see lower percentage movements among large-cap stocks when you compare them to mid-cap and small-cap offerings.
- More stability — If a major recession hits, bailout and government relief funds often go to large-cap companies first because these corporations have a much wider control over their respective sectors. Large-cap corporations are very unlikely to go completely bankrupt, especially as a result of a market correction or recession.
When recession hits, investors love to turn to place their funds in major market players by investing in a large-cap fund. As the name suggests, a large-cap fund is a fund made up of primarily large-cap stocks. Investing in a large-cap fund is a safer choice than investing in individual large-cap stocks because funds provide you with a greater level of market diversification. Some examples of large-cap funds you might want to invest in during a recession include:
- Vanguard Mega Cap Index Ins (VMCTX)
- Principal Blue Chip A (PBLAX)
- NASDAQ 100 Index Direct (NASDX)
- MSIF Global Franchise C (MSGFX)
- SunAmerica VAL Co I Lg Cptl (VLCGX)
Federal Bond Funds
Bonds are particularly popular with investors during periods of economic downturn because they have insurance and a guaranteed value. Before we cover what a federal bond fund is, we need to quickly go over the definition of a bond.
Bonds are a type of asset class that allows a government or corporation to borrow money from investors. In exchange, the entity borrowing the money agrees to pay the money back over time with interest. Bonds have maturity rates, which means that when you invest in a bond, the entity you give money to agrees to pay back what they borrowed by a set date. Unlike a stock, you don’t own a portion of the entity issuing the bond when you purchase it — instead, you owe a percentage of its debt obligation. As a result, bonds rarely see significant price increases, but they’re also reliable and safe investments during recession.
Federal bond funds provide investors with a great deal of stability because they have insurance from the federal government. When you invest in a federal bond, you don’t need to worry about the company you loaned money to going out of business and failing to repay its debts. Most federal bond funds invest heavily in U.S. Treasury bonds, which are considered to be some of the least volatile and safest investments in times of recession.
Here are some examples of federal bond funds you may want to consider investing in.
- Fidelity Spartan Long-Term Treasury Bond Index Fund Fidelity Advantage (FLBAX)
- MassMutual Select Strategic Bond A (MSBAX)
- Dreyfus US Treasury Long-Term (DRGBX)
- T. Rowe Price US Treasury Long-Term (PRULX)
- PIMCO Real Return A (PRTNX)
Municipal Bond Funds
Municipal bonds are similar to federal bonds in that they represent debt obligations and rarely show high volatility. However, instead of representing debt to the federal government, municipal bonds represent debt to cities, state and local governments, and local municipalities. Though municipal bonds are considered to be slightly less safe than federal bonds, they’re still a very solid choice for conservative investors looking to safeguard their funds against the effects of a market correction or recession.
Like a federal bonds fund, a municipal bond fund is a collection of municipal bond investments packaged together and trading as an individual entity. There are two types of municipal bonds that might make up your municipal bond fund:
- General obligation bonds — General obligation bonds are issued by state and local governments. General obligation bonds are unsecured, which means that they aren’t tied to a specific asset. Instead, they’re backed by the “full faith and credit” of the government issuing the bond, which has the power to tax residents in order to meet its debt obligations.
- Revenue bonds — Revenue bonds aren’t backed by the taxation power of a government entity. Instead, they’re tied to a revenue stream for a particular public project. For example, a revenue bond might go towards the construction of an interstate highway, which recoups what it borrowed plus interest in toll charges. Some revenue bonds are “non-recourse” bonds, which means that if the revenue stream funding the repayments dries up, the bondholder doesn’t get to claim ownership of the asset in lieu of regular payments.
Municipal bonds often also have tax advantages as well. The interest you earn on a municipal fund is generally not subject to federal income tax. If you live in the state or city issuing the fund, you might also be exempt from state and local taxes on interest you receive from your municipal bond investment.
Here are a few examples of municipal bond funds you might want to consider adding to your portfolio to hedge against recession.
- Vanguard High Yield Tax Exempt Fund (VWAHX)
- Nuveen High Yield Municipal Bond Fund (NHMAX)
- Goldman Sachs High Yield Municipal Fund (GHYAX)
- Vanguard CA Intermediate-Term Tax-Exm Fd (VCAIX)
- Wells Fargo CoreBuilder Shares Series M (WFCMX)
Money Market Funds
Money market funds are another solid and safe choice that can be appealing for investors during a recession. A money market fund is a type of fund that invests its assets solely in cash and cash securities. As a result, money market funds are highly liquid investments that produce reliable income through interest in short periods of time. While money market funds rarely increase in value, they’re one of the safest options for investors terrified of losing their cash.
Some of the assets that might make up a money market fund include:
- Certificates of deposits (CDs)
- Commercial paper
- U.S. treasuries
- Bankers’ agreements
- Repurchase agreements
Each money market fund is made up of its own combination of assets, typically chosen by the fund manager. Including a variety of assets helps improve diversification in your fund, which helps protect you against losses associated with inflation.
One thing to keep in mind before you commit to investing in a money market fund is that these funds often come along with minimum initial investment requirements. If a fund has a minimum initial investment, it means that you need to invest at least that much money to buy into the fund. The number of shares you’ll receive will depend on the price of each share. After you meet the minimum initial investment, you can invest as much or as little you like beyond it.
Your initial minimum investment can be as low as $0 and as high as $10 million. This means that money mutual funds can be a more price-prohibitive investment when compared to individual stocks or ETFs, which only require an initial investment equal to the price of one share.
Here are a few money market funds that you may want to consider investing in. Each option has a minimum investment of $3,000 or less.
- Invesco Premier Portfolio (IMRXX)
- Vanguard Prime Money Market (VMMXX)
- Vanguard Federal Money Mkt. (VMFXX)
- Fidelity Money Market (SPRXX)
- USAA Treasury Money Market Trust (UATXX)
When a recession is occurring, it can be difficult to see the bigger picture and remember that prices will rise again. If you’re a younger investor with more years until retirement, you have plenty of time to ride through the recession — and now might be an excellent time to pick up a few dividend funds that will produce income for years to come.
A dividend is a small portion of a company’s profit that a company elects to pay out to shareholders, usually on a quarterly or annual basis. For most companies, there is no requirement that they pay out anything in dividends. However, paying dividends is an excellent way to encourage investors to hold and buy more of a certain stock — especially in times of economic uncertainty.
Dividend funds are a type of mutual fund that primarily invests in companies that pay out high dividends. In many cases, these funds show less volatility than other managed mutual funds because dividend fund shares if they produce regular and reliable income.
Let’s take a look at a few dividend funds you might want to consider investing in.
- iShares Core Dividend Growth ETF (DGRO)
- ProShares S&P 500 Aristocrats ETF (NOBL)
- Vanguard High Dividend Yield Index Fund ETF Shares (VYM)
- Vanguard Real Estate Index Fund ETF Shares (VNQ)
Weathering Through a Recession
While it might seem like a recession will never end, the truth is that a recession presents opportunities as well as downturns. A recession can be a great time to invest in a large-cap or dividend fund that was previously out of your price range. If you’re an older investor focused on protecting what you’ve saved, a money market fund, municipal or federal bond fund can be safe and reliable options.