How to Invest During a Recession
Recessions feel terrifying but create the best buying opportunities. Here's exactly what to do with your investments when the economy turns ugly.
📚 Part of our Complete Investing Guide
A recession is officially defined as two consecutive quarters of negative GDP growth. In practice, it means layoffs, falling stock prices, headlines screaming economic doom, and most investors making the worst financial decisions of their lives.
The investors who build real wealth do the opposite of what feels natural during a recession. This guide explains exactly what that looks like.
What Happens to Investments During a Recession?
Stock markets typically fall before and during recessions — often significantly. The S&P 500 dropped 57% during the 2008-2009 financial crisis, 34% in the COVID crash of 2020, and 49% during the dot-com bust of 2000-2002.
But here is the critical fact most people overlook: markets recover. Every single recession in US history has eventually ended, and the S&P 500 has gone on to reach new highs every time. The 2020 crash recovered in five months. The 2008 crash took about four years to recover fully — but investors who kept buying throughout made extraordinary returns.
The Biggest Mistake Investors Make
Selling when prices fall.
It feels rational. Prices are dropping. The news is terrible. Selling seems like it stops the bleeding. But selling converts a temporary paper loss into a permanent real loss, and leaves you on the sidelines when the recovery happens — which always does, and often violently fast.
Investors who sold during the March 2020 crash and waited for things to "calm down" watched the market recover 60% in the next six months before many of them bought back in.
What to Do During a Recession
1. Keep Investing (This Is the Most Important Thing)
If you have automatic monthly investments set up, do not touch them. Keep buying. You are now buying the same index funds at a 20%, 30%, or 40% discount. Every dollar you invest during a recession buys more shares, which means more future growth when prices recover.
This is the principle behind dollar-cost averaging — investing consistently regardless of market conditions eliminates the impossible task of timing the market.
2. Rebalance Your Portfolio
If stocks have fallen significantly, your portfolio is now more bond-heavy than you intended. Rebalancing means selling some bonds to buy more stocks at depressed prices. This is mechanical, disciplined, and one of the few ways to systematically buy low and sell high.
3. Protect Your Emergency Fund
Before investing aggressively during a recession, make sure you have 3-6 months of expenses in a high-yield savings account. Recessions bring job losses — you do not want to be forced to sell investments at a loss because you need cash for rent.
4. Avoid Leverage and Speculation
Recessions are not the time to use margin, buy options, or load up on speculative stocks hoping for a quick recovery. Leverage amplifies losses and can result in forced selling at the worst possible moment.
5. Increase Contributions If Possible
If your job is stable and you have a solid emergency fund, a recession is one of the best times to increase your investment contributions. You are buying assets that are on sale. The investors who became wealthy from the 2008 crash were those who kept buying S&P 500 index funds when everyone else was panicking.
What to Invest In During a Recession
Broad index funds are your safest bet. VOO, IVV, or a total market fund like VTI gives you diversification across all sectors, so a downturn in any one industry does not wipe you out.
Defensive sectors tend to hold up better during recessions: consumer staples (food, household products), utilities, and healthcare. These are not exciting, but people still buy toothpaste and pay electricity bills regardless of the economy.
I-Bonds and Treasuries are worth considering if you are close to retirement and need to protect capital. In a recession, government bonds often appreciate as investors flee to safety.
Avoid highly indebted companies, cyclical sectors (airlines, hotels, luxury goods), and anything speculative. These are most vulnerable in downturns.
The Mindset Shift That Changes Everything
Warren Buffett's most famous advice: "Be fearful when others are greedy, and greedy when others are fearful."
A recession is the market offering you a sale. The problem is that the sale feels terrifying because everyone around you is panicking. Your job as a long-term investor is to separate your emotional response from your financial decisions.
The investors who keep buying during recessions — who treat falling prices as opportunity rather than disaster — are the ones who build lasting wealth.
The Bottom Line
Do not sell. Keep your emergency fund intact. Keep investing. Rebalance if you can. And if your situation allows it, invest more than usual.
Every recession in history has ended. The only investors who permanently lost money were those who sold and never came back.
The Psychology of Money by Morgan Housel — The best book ever written on how emotions drive financial decisions. Essential reading for understanding why we panic during recessions and how to stop.
The Simple Path to Wealth by JL Collins — Written partly as advice for surviving market downturns with your sanity intact. Collins explains exactly why staying the course through crashes is the right call.
Prefer audiobooks? Both titles are available on Audible — try it free for 30 days and get your first audiobook included.
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