Home Business NewsBusiness Why some things are "recession-proof" and others are not

Why some things are "recession-proof" and others are not

9th Aug 17 3:23 pm

Here’s the answer

Those of us who lived through the Great Recession know that investments are no guarantee. When the market for subprime mortgages collapsed in 2007, it sparked a panic that spread into a national and worldwide crisis in 2008. The stock market plummeted, and investors tried desperately to sell off stocks as the whole economy went into a downward spiral. This was the beginning of the Great Recession, which dragged on for years: the Dow and S&P 500 didn’t hit pre-crisis levels again until 2010, and other areas of the economy and of the world are still not fully recovered – Italy won’t see pre-recession growth until sometime in the 2020s, for instance.

All of this is enough to make modern investors a little wary. While investing is still a good idea, most of us probably prefer to have some safe bets in our portfolios. That’s the appeal of supposedly “recession-proof” investments: that, in the event of another crisis, they would better hold their value than most stocks did back in 2008. But what does it mean to be “recession-proof?” Why are some investments recession-proof, while others are not?

What does “recession-proof” mean?

Essentially, all “recession-proof” means is that, in the event of a recession, these are things that won’t collapse?

But why?

Recessions work because people take their money out of things: out of banks, out of stocks, out of their savings accounts. They worry about losing their money, so they pull it out of the market. They worry about losing their jobs, so they pull their money out of their hobbies, their country club membership fees, and other things. They do lose their job (maybe they worked at a country club and everyone cancelled their membership!) and so they pull their money out of their savings accounts to pay their bills, which loses the bank money, which means someone at the bank loses his job, and he pulls his money out of the stock market, and… well, you get the idea.

Things that resist this chain reaction are called “recession-proof.” They’re usually recession-proof for one of two simple reasons:

They’re essential, so people can’t pull their money out, or

They’re inversely related to the economy having the panic.

The first one is fairly simple. If you run a grocery store and I run a country club, we may both do well during a boom economy. I may even do better than you, because if someone’s income doubles, they’re more likely to add a golf membership to their current pool membership than they are to suddenly start eating twice as much food! But in a bad economy, I’m in trouble. If a golf member of my country club who shops at your grocery store suddenly loses her job, she is not going to suddenly quit eating food – she’s going to cancel her membership in my country club. My country club is not recession-proof, and nor are the jobs of the people who work there, and nor are the stocks I’ve issues for my country club ownership corporation. By contrast, your store is somewhat recession-proof.

Luxuries are vulnerable to recessions. RVs are an incredible way to take a vacation, but nobody is going to choose them over food during an economic crisis. Country clubs, RVs, and sports cars are not recession-proof. But essential expenses like food (economists call them “inelastic goods”) and un-fireable folks like tenured teachers are.

So that’s the first type of recession-proof good. Now for the weird one: investments that have an inverse relationship to the economy in crisis. This isn’t as tricky as it sounds, though. Imagine that your country is dealing with runaway inflation. The value of your currency is plummeting, and that’s terrible. But what if you have a lot of money in another country’s currency? Relative to the value of your home country’s currency, that money is now more valuable.

If a dollar can buy less and less grain each day, it’s better to own grain than dollars (at least for now). So recession-proof investments include commodities like gold, which can become more valuable relative to your country’s currency if a recession hits.

How to safely use recession-proof investments 

There is an important caveat to note here: nothing is completely recession proof. To return to our prior example, neighbors who lose their jobs won’t instantly stop buying food at your grocery store – but they may buy cheaper brands or buy a little less. In dire situations, they may have to go to the soup kitchen instead of to your grocery store! Similarly, experience has shown us that commodities are not entirely recession-proof. If you have some silver when the economy crashes, you’re better off than you would be with penny stocks. But if your job is less recession-proof than your investment, you may have to pull your money out to pay your bills, and bam: the recession has now affected the price of this commodity, through you. And, of course, you probably won’t be the only one!

Still, some investments are decidedly more recession-proof than others.

Look into your options: commodities like gold may rise in value relative to deflating currency, and aren’t as tied to the stock market and its panics. If you own a bond from a big company or the government, you have a fairly reliable guarantee of a certain return – and if a government desperate to encourage new business lowers interest rates on loans, your bond and its higher-interest rate will look pretty good. And, of course, stocks in companies that offer inelastic goods are more recession-proof that stocks in startups and companies that offer luxury goods and services, so look into a gold ira when you’re thinking about options for retirement.

Having a diverse selection of these types of investments in your portfolio can give you some much-needed security in the event of an economic downturn.

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