Recession-Proof Investing for 2022

Author's note: After 8+ years in the investment industry and having everything I said or wrote vetted by compliance, I relish my freedom to share more of my opinions with readers than I could with my clients. I try to share as much information as I think helpful, much of it based on my own personal experiences. That also means that there are opportunities included in this article that I have used previously, am using currently, or that I may use in the future.

Let's start this off by patting ourselves on the back for making it out of 2020 & 2021 alive. Without sarcasm or hyperbole—it's truly a feat worth celebrating. Now that we've got that out of the way, we can look ahead to 2022 and beyond.

It seems like there's finally some light at the end of the tunnel as vaccines are rolled out and stimulus payments are dispersed.

However, even though things seem to be looking up, a lot of Americans are still understandably gun-shy when it comes to investing right now. Although early 2021 saw increased interest in retail investing due to the buzz created by Reddit and Gamestop, there's a large contingency of investors who are afraid to gamble with investing right now because things still feel so unstable.

If you're timid to invest right now because it feels like there's a piano dangling from a thin rope above the economy's metaphorical head, this guide is for you.

6 key strategies to use in an uncertain economy

This spring has highlighted innumerable risks that most investors never consider. And yet, when one of them comes to pass, investors are thrown for a loop. Many don’t know how to react.

The stress inherent in a recession also means people are far more likely to rush into decisions, overthink, or second-guess due to stress.

So, here are some strategies to help you keep your wits and recession-proof your investments:

1. Don’t focus on the here and now

When the music stops and not everyone has a seat, it’s always easy to get down on the here and now. Stocks are down, real estate is down, credit is harder to get. Almost everyone will see their net worth decline on paper; many will encounter more significant obstacles like lay-offs.

During these times, it’s best to keep your focus on the long-term. This isn’t just to say “keep your chin up.” Rather, invest for the long-term. Think strategically about your investments, your career, etc. Recessions present big opportunities for those who can ignore short-term volatility and make informed decisions for the future.

2. Reassess your risk tolerance

Most recessions aren’t short-term events. Markets don’t decline and immediately recover. Instead, investors can expect a 4- to 10-year period of depressed asset prices and a limp-along economy.

During this time, interest rates will be down on loans but also on investments. Many investments will also have numerous short-term ups and downs. Investors need to decide whether they’ll be able to hang in, or if they need to just sell some investments and would feel better with the cash.

There’s nothing wrong with either choice, but investors who prefer to sit out the market’s fits and starts need to accept that they’ll miss out on some gains. Those who prefer to cash in on big windfalls when the market recovers need to be willing to tolerate plenty of volatility upfront.

3. Know your cash needs

The last thing that any investor wants to do during a recession is to be forced to sell assets at distressed prices so they can meet living expenses. But, you also don’t want to find yourself in credit trouble or unable to pay your bills.

So what’s the answer? Whatever makes you comfortable. If it would help set your mind at least to liquidate some investments and hold the cash in case you need it for expenses, then do that. If you want to cut expenses and accumulate cash over 8 to 12 weeks so you have a rainy-day-fund, great!

If you already have an 8-figure portfolio and enough cash to cover your living expenses for the next 5 years, then this isn’t for you. Go over to YachtWorld and stimulate the economy, why don’t ya?

4. Keep the shop lights on

You have to be able to pay your personal expenses through a recession, but you also have to be able to meet whatever carrying costs you have for investments, businesses, and side hustles.

If you have a lawn care business on the weekends, this means keep your insurance current, your taxes paid, and gas in the tank. If you have rental properties, make sure your mortgages, insurance, and taxes are all paid.

Granted, your carrying costs are probably zero if you invest in traded securities like stocks, bonds, mutual funds, ETFs. But, carrying costs or “cash calls” can be significant if you’re investing in real estate or private companies. (Cash calls are when your company requires you to come up with cash to cover current expenses.)

5. Limit your information intake to solutions, not problems

We saw this already when the coronavirus outbreak started in earnest in the United States. Everywhere you looked were negative headlines. Feelings ranged from indignant or depressed to apoplectic. And prolonged poor economic news will have the same effect.

With so much news coming at us, it’s easy to think there’s something we should do in response to headlines. But, the fact is, once something’s in the news, it’s probably too late to help you anyway.

So, while it’s important for investors to stay current, staying glued to financial news increases the likelihood of overreacting or making bad decisions. Carve out a little time each week to check in on your portfolio and digest the relevant headlines. Get the news you need, then get back to doing anything else.

6. Set it and forget it

Perhaps the most important thing for you to recession-proof your investments is to decide early on and stick with it. Figure out early how much cash you need, what types of assets you’re willing to invest in and how much, understand how much risk you’re willing to tolerate, then take your hand off the wheel.

Instead of dwelling on your finances, go back to focusing on what makes you money. After all, if you stop and get laid off, it’s going to be hard to find another job in a recession.

Generally speaking, once you’ve put your strategy in place, you should maybe reassess every 6 to 12 weeks if there are systemic changes in the market or economy and you think adjustments need to be made. Otherwise, try to avoid change for change’s sake. To do so is to confuse action for progress.

The case for sticking to big names

One of the more prescient moves that many risk-averse investors take is to consolidate their investments among a small list of “safe” names. These may be well-diversified mutual funds or ETFs or individual companies that are considered bedrock institutions.

This allows them to reduce their risk of loss while also staying invested so they can still profit when the market recovers.

The case for mutual funds and ETFs is relatively straightforward. These funds are diversified. They allow you to shotgun your investment out over hundreds or thousands of individual companies. Even if one or two of them go broke, you won’t get hurt too bad.

The downside, though, is that there’s less potential upside when the market starts back up, because funds will inevitably be held back by some of the losers.

The case for individual stocks is a little tougher to make—typically this only makes sense for folks who are less risk-averse and willing to ride out short-term volatility. But, even still, it’s best to stick with big names—the companies that come to mind when you hear the words “too big to fail.” These are the companies that the government literally won’t let go broke.

So, if super-risky investments like private companies and real estate are too risky for you in this climate, you may decide you just want to stick to highly-liquid stocks/bonds/ETFs that may be a little less volatile, or at least let you cash in if you want to get off the ride.

Funds to consider

Top blue-chip stocks

Other ways to invest in a recession

We’ve covered the steps you can take to recession-proof your portfolio, but those aren’t the only investments that you can make during an economic downturn. Here are a few things that you might not think of as ways to take advantage of a recession.

1. Invest in yourself

When I got laid off back in November and went back to freelancing full-time, I found a cost-effective online Master’s program that I can use in any number of ways. You don’t need to lose your job to do the same.

If a formal degree isn’t your thing, consider taking courses online through a platform like Skillshare, or enroll in professional development courses at a local university or community college. Take advantage of the downturn to invest in yourself and develop your knowledge and skills. These investments will pay serious dividends later.

2. Pay down debt

If you’re able to lower or trim back your monthly expenses (and you should be able to, with so much of the economy shut down), consider using some cash to pay down credit card debt or pay off smaller student loans. This reduces how much you have to make each month by eliminating debt payments; so, if you do get laid off or see your earnings drop, it won’t be quite so painful.

3. Real estate

Most of this article focused on traditional stock and mutual fund investing, but real estate can be a great investment during a recession. Rental property is still usually in demand. You could also go the crowdfunding route, but that can be much riskier—especially in a recession. Even in a downturn, people need someplace to live.

Wrapping up

Recessions are no fun, but they’re also tremendous opportunities. They help us reassess what’s important in our lives—reconsider the choices that we never even think about when times are good.

Plus, they’re excellent buying opportunities. If you’re careful and do your homework, you can make some shrewd investments that can really boost your net worth over time. Just be sure to keep your head about you, stay patient, don’t overreact, and focus on the things you can control. That’s how you make it through a recession.

Disclosure: The author owns shares in some of the investments included in this article. The opinions expressed in this article are for general information purposes only and are not intended to provide specific advice or recommendations about any investment product or security. This information is provided strictly as a means of education regarding the financial industry.