While many investors might be unsure about continuing to invest during periods of stock market volatility and economic uncertainty, recessions, which often coincide with lower stock market valuations, can present unique opportunities to purchase investments at reduced prices. This can allow your investment dollars to stretch further during even the most challenging times.
Currently, global markets are experiencing significant turmoil. On Monday, fears of a slowing U.S. economy triggered intense volatility and dramatic fluctuations on Wall Street.
Last week’s disappointing economic data included a weaker-than-expected jobs report, which exacerbated investor anxiety, ultimately causing the Dow Jones to plummet nearly 1,034 points (2.6 percent) to close at 38,703.27.
Meanwhile, the S&P 500 and Nasdaq composite indexes dropped 3.0 percent and 3.4 percent, respectively. Even major tech stocks like Nvidia and Microsoft saw sharp declines as apprehension around artificial intelligence persisted.
Despite these market upheavals, some investors see potential opportunities. If you are considering investing during this period, here are 10 smart investments to start making .
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1. EFTs or mutual funds
Investing in exchange-traded funds (ETFs) or mutual funds is a tried-and-true strategy in all markets, but you can get even better deals during a recession.
These funds are made up of a basket of stocks, sometimes hundreds or thousands of different equities and other investments.
If you're a long-term investor, putting money into an ETF or mutual fund every paycheck allows you to dollar-cost average your investments. Dollar-cost averaging means you are buying shares regularly, no matter what the price.
Over a period of time, you most likely will buy some shares at a higher price and some at a lower price. This averages out the cost of the shares and reduces volatility in your investment.
And choosing a fund that tracks an index, like the S&P 500, gives you access to a large portion of the stock market for very low fees.
Pro Tip : Search for ETFs offered by one of the best brokerage accounts and look for the ones with the lowest expense ratios.
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2. High-dividend stocks or funds
If you're worried about cash flow, investing in high-dividend stocks or funds can be a great way to generate monthly or quarterly income. These stocks and funds are typically made up of solid businesses that are paying out a portion of the earnings to investors.
Yields on these stocks and funds may be as high as 5% APY or higher. But be aware that some very high yields may mean the underlying business may be at risk, and the stock price could drop drastically, erasing your dividends. Sometimes, companies also cut dividends to help improve cash flow.
It may be a good idea to stick with well-known names for dividend stocks.
3. High-yield savings accounts
High-yield savings accounts offer higher rates than a standard savings account while still giving you direct access to your money. With the interest rates on loans on the rise, the interest rate being paid on bank savings accounts is a fraction of 1%.
However, some of the best high-interest accounts are currently offering 4% APY or more, and most don't require a high minimum balance.
If you're looking to park your cash somewhere safe and liquid, high-yield accounts are FDIC-insured up to $250,000. You can simply open an account and transfer funds to start earning money right away.
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4. Bonds and bond funds
Bonds are investments in corporate or government debt, paying out a regular “coupon” payment to investors. Bonds have been hit hard over the past few years due to rising interest rates, but now the yields on bonds and bond funds are rising as well.
Since loans now cost more, those higher rates translate into greater interest payments to investors, some as high as 4% APY or more.
If you're looking for steady income from your investments, consider allocating some of your portfolio to bonds or bond funds, as prices are depressed and yields are much higher than normal.
5. Tech stocks
Yes, tech stocks have been slammed over the past year, and even some of the biggest names in tech including Amazon, Netflix, and Tesla saw their valuations cut in half.
But if you're a believer in innovation and want to grab a great deal on tech stocks, a recession may be the perfect time to do it.
Companies with strong cash flow and a large balance sheet may weather the storm and ultimately come out of a recession stronger, as many competitors will get washed away.
While volatility in tech is a hallmark of modern recessions, if you can stomach the roller coaster, buying into tech may be a good bet.
6. Real estate
Real estate has been very strong over the past decade, and even more so over the past few years. But with the federal funds rate causing mortgage rates to skyrocket, housing is starting to correct to the downside. And this may mean deals for you.
If you're in the market for real estate and have the cash to purchase a home, or the ability to make a strong offer, you may be able to find a home at a discount.
Before a recession, housing is typically harder to buy, but in the later stages of a recession, sellers may become desperate to sell and cut prices.
If you don’t have the funds to buy a home right now, consider investing in a real estate investment trust (REIT).
These funds allow you to buy a small portion of a commercial or residential real estate project that is professionally managed, and you earn income from rents and equity in the property. This is a great alternative investment you could make for less than $1,000.
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7. Defensive stocks
Defensive stocks are just that: a “defense” against market volatility during a recession. These stocks are companies that have a long track record of profit, typically pay out regular dividends, and include household names like Johnson & Johnson and Coca-Cola.
These stocks are considered defensive investments because they simply aren't as volatile as other companies. This is usually due to low leverage, a wide breadth of products, and broad market reach.
They may still drop in price during a recession, but maybe not as much as other sectors like tech stocks, and have usually been through multiple recessions before. If you want an investment you can be confident in, a defensive stock may be a good play.
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8. Precious metals
Precious metals like silver and gold typically see an increase in demand during market downturns and recessions. This is because gold and other precious metals are seen as safe-haven assets and a way to preserve purchasing power over time.
And since inflation has been running red hot, investing a portion of your portfolio in precious metals may be a good idea. Just remember, precious metals are considered an alternative asset, and probably should not make up a large part of your investments.
9. Bitcoin
Cryptocurrency has been volatile over the past few years. It seemed to rise from the ashes in 2021 to mark all-time high prices, only to crash spectacularly in 2022.
But while many major crypto projects have failed completely and erased billions of dollars in unclaimed profits (think FTX), Bitcoin still remains the most popular crypto asset.
While Bitcoin hasn't been through a recession, it has shown staying power since its inception in 2009. In fact, Bitcoin has been the best performing asset over the past decade and still hasn't fully penetrated major markets around the world.
While Bitcoin, and crypto in general, is a speculative investment, if you are a crypto believer, investing in Bitcoin during a recession may give you the opportunity for outsized returns in the future.
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10. Yourself
Let’s face it, while investing is nice, increasing your income is the most powerful thing you can do. Because the more money you make, the more you can invest.
While recessions are marked by stagnant wages and layoffs, they can be a great opportunity to invest in yourself.
Level up your skills by taking online courses or classes to become certified in your field, take on extra responsibility to gain workplace skills, and continue to educate yourself to make you and your resume more marketable.
If you spend a few hours a week investing in yourself, you may come out of this recession ready to take on new roles and drastically increase your income.
Bottom line
Recessions are no fun. But they may be a great opportunity to give yourself a head start financially.
Investing in high-quality assets that have strong growth potential can help you grow your investments quicker because a recession lowers the prices of nearly every investment.
If you have a long-term investing approach and can handle the volatility, now may be the perfect time to double down and invest more to boost your bank account .
Just make sure to diversify your investments, and don’t put all your money into any one type of investment.
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