Investors have been rightfully nervous over the last few years. Not only do we have growing recession fears, there’s also the ongoing bank saga: First Republic was acquired by JPMorgan Chase on Monday in a deal led by the government, and regional bank PacWest’s shares have dropped by more than 72% since the start of 2023, and the bank is reportedly weighing a sale.) There’s also the continuing war in Ukraine, oil cutbacks in the Mideast, layoffs in the tech sector and more. But when the future is uncertain, it’s arguably even more important to continue saving and investing for the rainy days that may lie ahead. This is why we’ve been hearing the question: “Which investments should I avoid during a recession?” quite often in our InvestingFixx classes.
And it’s a question that’s especially important to answer today, because in addition to market woes, inflation continues to be a gut-punch for women and their money. Specifically, inflation is negatively impacting the amount of money women are setting aside for retirement.
More than a quarter of all women say they cut their retirement savings to deal with inflation over the last few years, and 13% of women stopped saving altogether according to the annual Personal Finance Index from the TIAA Institute and the Global Financial Literary Excellence Center at the George Washington University School of Business.
“A recession coupled with a market downturn presents elevated risks to those who are very near or recently entering retirement,” says William Thompson, a certified financial planner with Valor Wealth Partners. “As they will now be reliant upon their portfolios for income rather than a paycheck, strategic income and investment planning are especially vital during a downturn to avoid the triple whammy of market losses, extreme reduction in standard of living, and premature depletion of those assets.”
READ MORE: How to Handle Sudden Stock Market Moves
And during times of market losses, it’s essential that we continue to invest. “Unfortunately, a number of investors who suffered significant losses after the 2008 financial crisis never returned [to the market],” he says. “This is clearly a trauma response. That’s possibly hundreds of thousands of dollars in lost opportunities along with time that can’t be recouped.”
In other words, the thing that matters most is time in the market, not timing the markets. The best thing savvy investors can do is to get invested and stay invested. (Learn more about how to keep a cool head during market downturns via the InvestingFixx investing club!)
That said, there are some sectors that perform better than others during market downswings, which is why we decided to take a look at some of the investments to avoid during a recession. Now may be a good time to take a look at your portfolio and check out your allocations to make sure you’re not too heavily weighted in certain areas that don’t historically weather storms quite as well as some others. Here’s a look at a handful of sectors and investments to avoid going all-in on during an economic downturn or recession.
International and Emerging Markets
If there was a lesson in the 2008 Great Recession, Thompson says, it was that “international developed markets and emerging markets were the absolute worst performing asset classes.” So, if you know you’re going to lose sleep if you see those on-paper losses, you might not want to go all-in on this sector.
That doesn’t mean you should allocate all of your money elsewhere, as international and emerging markets may quickly rebound. “You would be hurting your portfolio diversification, and you could be missing an opportunity,” Thompson says. Soon after the 2008 downturn, emerging markets became the “best performing asset class, with developed markets as the third best. You must keep that view of playing the long game in focus when it comes to your investments even during the difficult times.”
Tourism and Hospitality
“The tourism and hospitality industry is often negatively impacted by a recession,” Thompson says. Why? Because when Americans’ lose (or fear losing) job security, our discretionary spending drops. Little luxuries like vacations, fancy dinners out and hotel stays are often some of the first line items to be stricken from our budgets.
Investors in luxury hotel chains or high-end chain restaurants should pay particular attention here, because when household budgets tighten, people who are still taking vacations often opt for cheaper motels rather than fancy resorts. Likewise, people do still eat out during hard times, but the corner Chinese takeout joint may replace pricier P.F. Chang’s as most families go-to option. During tough times airline travel also takes a hit, as more of us opt for road trips rather than far-flung getaways.
One typical exception to this rule? Companies like Disney and Universal (which is part of Comcast), because while travel to theme parks may diminish, these companies are so diversified they actually make more money from their home entertainment divisions and other holdings, when people stay home. In other words, the mouse is rarely, if ever, a bad buy. And challenging Mickey to a fight, as Florida Governor Ron DeSantis seems to be learning, is not going to be a piece of cake. As CNN notes: “Florida needs Disney more than Disney needs Florida.”
“The automotive sector is another that will feel the pinch in a recession,” says Thompson. “Consumers will often opt to pay for repairs and keep their cars on the road longer rather than commit to a large purchase such as a new car.”
Also, depending on how long the bad times last, families may opt for sedans over SUVs and less expensive, more fuel-efficient models, like hybrid or electric cars. With that in mind, savvy investors may want to keep an eye on the largest manufacturers of fuel-efficient cars, including Toyota, General Motors, Tesla and Ford.
Amazon + Other Large Retailers
Retail is often one of the hardest-hit sectors during a recession, and no one sells more products today than the giant online seller of… well, everything. As soon as people start cutting back, those easy impulse purchases we make when we’re mindlessly adding-to-cart will be some of the first to go. It’s also worth noting that Qurate Retail, the parent company of QVC, HSN and other outlets beloved by shoppers, tends to see sales drops when the economy falters.
The good news for all investors — no matter your sector of choice — is that historically markets show signs of recovery before a recession ends, Thompson says. U.S. markets usually hit a bottom about five to six months before a recession ends. In the case of the 2008 financial crisis, the S&P 500 bottomed out in March 2009, three months before the recession was declared over.
So, while there’s nothing any of us can do to prevent a recession or “inflation proof” our investments, we can prepare our portfolios to ride out the storm, and we can keep doing the most important thing to benefit our financial future, which is to keep investing — even when the markets (and inflation) are making us nervous. You got this.
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