How to Invest During a Recession

To invest during a recession, start with your own safety net, then stick to a long-term plan: keep an emergency fund, keep money you'll need soon out of stocks, and continue investing long-term money on a schedule instead of trying to guess the bottom. How you invest during a recession matters less than avoiding the forced or panicked selling that turns a temporary fall into a permanent loss.

Recessions are stressful because markets and jobs can weaken at the same time. This guide explains what a recession is, what history from official data shows and the principles investors use to get through one. It's education, not a forecast or personal advice. Investing involves risk, including loss of principal, and returns are never certain.

What is a recession, and what happens to investments?

In the US, a recession is a significant decline in economic activity that is spread across the economy and lasts more than a few months. That's the definition used by the National Bureau of Economic Research (NBER), whose committee dates US recessions, usually well after they've begun.

What tends to happen to each kind of investment:

• Stocks often fall, sometimes before a recession is visible in the data, as investors expect lower profits. Investor.gov notes that large-company stocks as a group have lost money in about one out of every three years, sometimes dramatically.
• Bonds can behave differently. The SEC explains that bond prices and market interest rates move in opposite directions, so if rates fall during a slowdown, existing fixed-rate bonds can rise in price; if rates rise, they fall.
• Cash in insured accounts keeps its dollar value, but its interest rate may drop and inflation can erode it.

If you're still putting your first plan together, our beginner's guide to start investing covers the building blocks this article assumes.

How often do recessions happen, and how long do they last?

Recessions are a normal, recurring part of the economy, and historically they've been much shorter than the expansions between them. NBER's records show that since 1945, US recessions have lasted about 10 months on average, while expansions have averaged about 64 months.

Two cautions. First, the length of a recession isn't the same as the length of a market decline or a job-market slump; recoveries in stocks and employment have taken different amounts of time. Second, averages describe the past, not the next one. Other countries' statistics agencies measure and date their own recessions, so UK, Canadian and Australian timelines differ.

What should you do before you change any investments?

Strengthen your own finances first, because job loss is the biggest recession risk for most people.

1. Check your emergency fund. Recessions often bring layoffs and reduced hours. A cash reserve means you won't have to sell investments at a low point to pay rent. Our guide to emergency fund vs investing explains how much to hold and where.
2. Tackle high-interest debt. Credit card balances become harder to manage if income drops.
3. Sort money by deadline. Anything you'll need in the next few years, such as a home deposit or tuition, usually belongs in insured savings or Treasuries, not stocks. Bank deposits are FDIC-insured up to $250,000 per depositor, per insured bank, per ownership category.
4. Write down your plan. Decide now what you'll do if your investments fall 20% or 30%, so you aren't deciding in a panic.

Should you keep investing during a recession?

For long-term money, many investors keep contributing on their normal schedule. Investor.gov describes dollar-cost averaging, investing equal amounts at regular intervals regardless of market ups and downs, as a way to manage risk; it means you automatically buy more shares when prices are lower.

Example (hypothetical): you invest $300 a month in a broad stock fund. If the fund's price falls from $60 to $40 a share during a downturn, the same $300 buys 7.5 shares instead of 5. Whether that pays off depends on what prices do afterward, which no one knows in advance.

What makes this hard is behavior, not math. Selling after a fall locks in the loss, and waiting for the "all clear" usually means buying back at higher prices. Our list of beginner investing mistakes covers panic selling and market timing in more detail.

Rebalance instead of reacting

Rebalancing is a rules-based way to act during a downturn. If stocks fall, they shrink as a share of your portfolio; rebalancing back to your target mix means moving some money from bonds or cash into stocks. Investor.gov's asset allocation guide explains the idea, and our guide on how to build an investment portfolio shows how to set the targets in the first place.

Which investments tend to hold up better in a recession?

Lower-risk assets generally fall less, but they also grow less, and none is immune.

• Insured savings and money market accounts: stable in dollar terms; the main risk is inflation.
• US Treasury securities: backed by the US government. Prices of longer-term Treasuries can still move with interest rates if you sell before maturity. Our guide to buying Treasury bonds explains the options.
• High-quality bonds and bond funds: generally steadier than stocks. Lower-quality, high-yield bonds can fall alongside stocks when defaults rise.
• Diversified stock funds: they fall in recessions, but they spread the damage across many companies instead of concentrating it.

Be careful with labels like "defensive" or "recession-proof". Some sectors have historically held up better than others, but companies can still cut dividends, and a fund labeled defensive can still lose money. Concentrating in one theme replaces market risk with a bigger, narrower risk.

What should you avoid when investing during a recession?

The costliest moves are forced selling, borrowing to invest and falling for fear-based pitches.

• Raiding retirement accounts: early withdrawals from a 401(k) or IRA can trigger income tax and penalties, and the money stops growing. Check the IRS rules before withdrawing.
• Borrowing to "buy the dip": margin and leverage magnify losses and can force sales at the worst time.
• Trying to call the bottom: recessions are only officially dated well after the fact, so neither the start nor the end is visible in real time.
• Fear-based sales pitches: downturns bring offers of "safe" high returns, crash-proof gold IRAs and secret strategies. Investor.gov's red flags include pressure to invest right now and promises of high returns with little or no risk.
• Betting on a single beaten-down stock: a company that falls sharply in a recession can also fail.

How do account types differ by country?

The principles are the same everywhere; the wrappers change. Keep contributing to tax-advantaged accounts if you can: a 401(k) or IRA in the US, a stocks and shares ISA or pension in the UK, a TFSA or RRSP in Canada, or super in Australia. If income drops, pausing extra contributions is usually less costly than withdrawing, since many accounts restrict or penalize early access. Check the rules on the IRS, GOV.UK, CRA or ATO websites before you take money out.

Next steps

• Make sure your safety net is in place with emergency fund vs investing.
• Learn how rising prices affect the same decisions in how to invest during inflation.
• Build a plan that can handle downturns with our investing for beginners guide.
• Or visit our guide to making money online for ways to build extra income if your job feels less secure.