Recession-proof investments

During a recession, consumer spending tends to decrease except for the "essential" items people must pay for. Cigarette addicts will continue to pay for cigarettes no matter how expensive they get and people will continue buying fuel for their cars as well as go to the doctor. During a recession, there are some excellent stocks to invest in, but how can you prepare your portfolio for a recession? Here are some great investments to help you protect your account before a recession hits.

One way to prepare for a recession is to invest in Treasury Inflation Protected Securities (TIPS). Every 6 months these securities will pay interest and return the principal. The principal amount for TIPS will automatically increase to compensate for inflation. Since they protect against inflation and are based on the U.S. Treasuries, they are considered a safe investment. TIPS are usually purchased through a bank or through a broker dealer. There are also bond funds available that allow investors to match the actual performance of TIPS. Bond funds offer more liquidly and are easy to sell.

Having a diverse portfolio will help you with risks you cannot control. High-yield bonds and small capitalization stocks are riskier investments and are not recession-proof. During a recession, the best investments include international stocks, short-term bonds, and bank certificates of deposit. During an abundant earnings period, the stocks are highly priced and not worth the investment from many investments. When the country is in a recession, the stocks become worth the price of gold because they will eventually increase but they can be purchased for hundreds to thousands of dollars less than they normally cost.

Companies to avoid during a recession are the smaller firms. Typically smaller companies need financing and customers to begin growing. Due to increasing unemployment, potential customers are not spending money like they normally would so smaller companies lose money. Real estate, investment banking, technology, luxury items, and commodities are vulnerable investments during a recession. Large firms tend to have more investors because they have solid earnings and steady streams of cash, plus they will pay dividends. During a recession, large firms will slide a little, but not to the extent of the smaller firms. Larger companies will find that borrowing will be at a lower rate and they will have an easier time obtaining financing for projects.

Several financial experts recommend becoming defensive during a recession. The companies that produce daily products will be successful. Companies that manufacture and sell food, tobacco, beverages, household products, and personal care items are going to continue doing well during a recession. Regardless of the economy, people need to eat and they like to continue feeding their habits like smoking or drinking. These large-cap consumer staple companies also pay excellent dividends and they continue to raise them over time. Having an investment that returns dividends will help during an economic crisis. Tobacco companies like Altria Group Inc. and paper companies like Kimberly Clark Corporation will continue producing positive numbers during a recession and they will pay good dividends to their investors.

Another recession proof investment is healthcare. People will always get sick and they will not stop seeing the doctor for medical needs. The healthcare companies and pharmaceutical companies will produce positive numbers during a recession and they also continue paying dividends. Healthcare investments leave the investors with a sense of security as they know the earnings will always be there.

Certificate of deposits (CDs) are excellent investments during a recession because they yield higher rates than bonds do during a recession. CDs and money-markets are usually better during a recession compared to stocks and bonds. For example, a one-year CD and a 6 month Treasury bill will pay about 5%. A stock or bond could be in the negative and you will lose money instead of accrue it. Buy a simple CD, like a 12-month CD during a recession. The short-term investments like stocks and bonds will continue to roll over at a lower yield than the long-term rates will.

International investing is always a smart decision during a recession. The export-driven markets of Asia and Latin America will lose U.S. demands while Europe and Japan will still obtain a strong customer base from other countries like Canada. European stocks are the best place to invest money when a recession hits. Look for European healthcare and food stocks since they are always in high demand in every country.

People will also continue using energy during a slow economy. While most people will try to conserve their energy costs by switching light bulbs or turning off air conditioners, they will continue paying their energy bill. Over the past 5 years MFS Utilities has reported at 30% annual increase in revenue. Another energy company that has grown by 14% is Northeast Utilities. Energy companies are also receiving money to install energy-efficient transmission lines, which will bring a good return on equity. Utilities tend to outperform in a recession and the future always remains solid for utilities.

One of the best ways to prepare for a recession is to save money. Even during a recession, save a little bit of money from each paycheck so you can prepare for potential lay-offs. It is always a wise idea to have at least 6 months of pay saved up in case you are on the receiving end of a company firing. There will always be less buying and selling during a recession, especially in the real estate market. If the recession has hit, don't panic and pull out of all your investments, this is actually the worst thing you can do. If you have a diverse investment portfolio, you should be able to weather the storm and watch your investments rise within a few months.

Typically a recession has a short-term effect on the stock prices. Investors with long-term goals fair better in a recession because they are able to wait out the recession. An investment portfolio needs to reflect the goals and risk tolerance of the investor. Before a recession, an investor needs to build a portfolio they are comfortable with in case the market ever was to experience a significant drop. Your stock holdings need to be maintained by dollar-cost averaging. Dollar-cost averaging is investing a certain amount of money at regular intervals, no matter what the stock movement is doing. Obviously when the prices rise, you won't get as many shares, but when they fall you can cash in on lower average prices. Dollar-cost averaging is a long-term investment strategy and is done best by the conservative investor.

Always look for some low-risk stocks to add to your investment portfolio. Stocks that have a low beta are the best ones to invest in when the market is down. The beta score is simply a measurement of the stocks reaction to the overall market. The higher the beta, the more risk you are taking on. One of the worst places to invest during a recession is the housing market. The housing market is always one of the first places to be hit during a recession. Homeowners that are looking to sell need to hang onto the home if they can afford to. When the housing market is down, homes tend to sit on the market for months, even years at a time. Individuals looking to purchase a home during a recession are in luck since interest rates are much lower than normal. The one common problem home buyers run into is purchasing a home that is out of their price range. Real estate is an investment and it needs to be done carefully. Borrowing is less expensive during a recession because the Federal Reserve is trying to help the economy. During recessions, some investors actually take on more debt because they feel the interest rates are too good to pass up on. Like any investment, you need to talk to your broker or banker and make sure you are investing your money into something that will produce a positive return.

Another great recession proof investment is gold. No matter what, gold will always have a positive number attached to it and will always be worth something in every market in every country. Gold is worth the investment since you can store it in your home for years and have the satisfaction of knowing it will still be worth something. During a recession; the investment in gold increases because of the risk of inflation. With so many people being laid-off, gold investors know it is important to concentrate on this long-term investment strategy to get them through the recession. Gold investors also have easy access to it whenever they need it. For example, say you have 60 gold bullion coins saved and you are laid-off from work the next day. You can use those gold bullion coins to feed your family until you can find another job. Gold has hit its highest point in 2008, which was over $1,000. Currently, gold is worth a little over $900. The nice part about gold investing is it is like having insurance for your investment portfolio. No matter what, you can always fall back on it even if you have lost hundreds or thousands of dollars in other stocks.