Protecting Your Assets When the Economy Shrinks
Let’s face it – recessions can be downright terrifying for investors. When the economy starts contrbling, our natural instinct is to grab our money and run for the hills! But is that actually the smartest move? As we stare down economic uncertainty in late 2025 this question becomes more urgent than ever.
I’ve spent weeks researching the safest places to put your hard-earned cash during economic downturns, and what I discovered might surprise you. Turns out, rushing to cash isn’t always the best solution – in fact, it could be one of the worst mistakes you could make.
Understanding Recessions: They’re Normal (But Still Scary)
First things first – recessions are a normal part of the economic cycle. Since 1950 the U.S. economy has experienced 11 recessions – that’s about one every 6-7 years on average. If you start investing at 25 you’ll likely face 6-7 recessions before retirement!
But here’s something that might shock you according to data from Fidelity Investments in five of those eleven recessions since 1950 the stock market actually showed positive returns. That’s right – economic downturns don’t always mean market declines.
This doesn’t make the anxiety any less real though. So where should you put your money when things look shaky?
The 7 Safest Places for Your Money During a Recession
1. Gold: The Traditional Safe Haven
Gold has proven itself time and again as a reliable hedge during uncertain times. Just look at this year – gold is up more than 30% while the S&P 500 has gained only about 8%. This isn’t coincidence.
According to Tom Bruce, macro investment strategist at Tanglewood Total Wealth Management, “Gold remains one of the most reliable long-term hedges against geopolitical and disaster risks.”
Central banks worldwide are also accumulating gold at historic rates. A recent World Gold Council survey showed 43% plan to increase reserves in the coming year, up from just 29% last year. This signals strong institutional confidence in gold as a store of value during turbulent times.
2. U.S. Treasury Bonds: The Ultimate Security Blanket
When markets get rocky, investors typically flee to the safety of U.S. Treasury bonds. Why? They’re backed by the “full faith and credit” of the U.S. government, making them one of the safest investments around.
Jason Brown, stock market expert at TheBrownReport.com, puts it well: “U.S. Treasurys are like the seatbelt of your investment strategy. Maybe not flashy, but they can save you when things get rough.”
During recessions, capital tends to flow into bonds, which can stabilize your portfolio. For someone balancing growth and wealth preservation, Treasurys are often a smart choice.
3. Dividend-Paying Stocks: Income When Growth Stalls
When the economy slows down, consistent income becomes increasingly valuable. Dividend-paying stocks can provide that steady cash flow even when stock prices are volatile.
“You’re not just hoping the stock goes up; you’re actually getting paid to wait,” explains Brown. Companies that maintain dividend payments during tough times typically have strong balance sheets and steady cash flow – exactly what you want in a recession.
These dividends can help offset price declines during market volatility, providing a cushion that growth-only stocks can’t match.
4. Defensive Sector ETFs: Essential Services Win
Some industries simply hold up better during recessions because they provide goods and services people need regardless of economic conditions. Think utilities, healthcare, and consumer staples.
Nik Agharkar, owner of Crowne Point Tax & Wealth Counsel, notes: “Rotating to staples can be a good strategy since, even in tough times, people are going to prioritize paying the electric, gas and health insurance bills, cutting discretionary spending.”
Some defensive sector ETFs to consider include:
- Utilities Select Sector SPDR Fund (XLU)
- Health Care Select Sector SPDR Fund (XLV)
- Consumer Staples Select Sector SPDR Fund (XLP)
5. High-Quality Corporate Bonds: Stability With Better Yields
High-quality corporate bonds from financially strong companies offer a compelling middle ground between risk and return during recessions.
“We like high-quality corporate bonds in a recession. As long as the underlying fundamentals of the company are solid, then a high-quality corporate bond should provide consistent income for investors,” says Louis Green, an advisor at Savvy Advisors.
These bonds typically have low correlations to equities, especially during recessionary periods, providing important diversification benefits.
6. Real Estate Investment Trusts (REITs): Property Without the Hassle
REITs can provide reliable income through dividends during market downturns. Many invest in essential properties like apartments, healthcare facilities, or warehouses, which continue generating rental income even in weaker economies.
However, Agharkar warns: “While these vehicles can provide stable returns, they can also come with high fees and tax implications that most do not consider.” Always check the prospectus for hidden fees and do your tax calculations before investing.
7. Cash or Cash Equivalents: The Ultimate Safety Net
Cash might seem like the obvious choice during a recession – and keeping some powder dry is definitely important. But there’s a major caveat here.
“Of course, getting out of the market entirely is an option,” says Agharkar. “But it is important to commit to a strategy that gets you back into the market once certain parameters have been met.”
Many investors who fled to cash during the 2008-2009 financial crisis missed the spectacular bull run that followed because everything seemed “too expensive” after the initial recovery. This highlights perhaps the biggest risk of the cash strategy – knowing when to get back in.
5 Tips for Weathering a Recession Without Panicking
1. Shore Up Your Cash Reserves (But Don’t Go All-In)
Having adequate cash reserves is crucial before a recession hits. For non-retirees, this means setting aside 3-6 months of living expenses in safe, liquid accounts like:
- Interest-bearing checking accounts
- Money market savings accounts
- Money market funds
- Short-term CDs
If you’re retired, your cash reserves should be much larger – ideally covering 2-4 years of expenses. This prevents you from being forced to sell investments during market declines.
2. Hold Firm When Markets Get Shaky
Timing the market is nearly impossible and often counterproductive. Some of the best market days occur right after the worst ones. Moving to cash for just one month following a market decline of 20% or more could cut your returns almost in half one year later!
As long as you have sufficient time and cash reserves, staying the course is usually the wisest strategy.
3. Consider Buying More When Prices Drop
Warren Buffett famously said bad news is an investor’s best friend because it lets you buy “a slice of America’s future at a marked-down price.”
However, there are important caveats:
- Never use emergency funds for new investments
- Don’t hoard cash hoping to time the perfect entry
- Don’t invest funds you’ll need in the short term
4. Make Tactical Tweaks, Not Wholesale Changes
During recessions, consider minor adjustments to your portfolio, but avoid dramatic moves. A good rule is never to deviate from your target asset allocation by more than five percentage points.
Some tactical adjustments to consider:
- Shift toward high-quality stocks with low debt and positive earnings
- Increase allocation to defensive sectors
- Consider fundamental index funds that favor value
- Lock in higher yields with longer-maturity bonds if interest rates are likely to fall
5. Get Professional Help If Needed
Sometimes an outside perspective is exactly what you need during stressful market conditions. A financial planner can help align your investments with your spending needs and goals, as well as help manage the emotional aspect of investing during turbulent times.
The Worst Mistake: Panic Selling
The biggest risk to your financial health during a recession isn’t usually the recession itself – it’s your reaction to it. Panic selling locks in losses and can devastate your long-term returns.
Consider this sobering fact from Schwab: Making a large withdrawal from your portfolio during a downturn—especially in the early years of retirement—can seriously erode your portfolio’s longevity. Their example shows that taking withdrawals during a market decline can reduce a portfolio’s lifespan by nearly half compared to taking the same withdrawals during normal markets.
My Personal Strategy
I’ll be honest – I’ve made my share of mistakes during past market downturns. In 2008, I got spooked and moved too much to cash, missing part of the recovery. That taught me a valuable lesson about staying the course.
These days, I maintain a diversified portfolio with adequate cash reserves, high-quality dividend stocks, some gold as a hedge, and U.S. Treasury bonds for stability. When markets decline, I view it as a potential buying opportunity rather than a reason to flee.
The Bottom Line: Safety Through Diversification
There is no single “safest” place for all your money during a recession. Instead, safety comes through thoughtful diversification across several recession-resistant investments and maintaining adequate cash reserves.
Remember that recessions, while painful, are temporary. The U.S. economy has weathered 12 recessions since 1948, with an average duration of just 11 months. However, it typically takes markets more than two years to recover to pre-bear market peaks.
By spreading your investments across gold, Treasury bonds, dividend stocks, defensive sectors, high-quality corporate bonds, selected REITs, and appropriate cash reserves, you position yourself to weather the storm while maintaining the potential to benefit from the eventual recovery.
What’s your recession strategy? Have you weathered economic downturns before? I’d love to hear your experiences in the comments below!
Batten down the hatches
The 5 Safest Places to Put Your Money During a Recession
FAQ
Where should I put my money if a recession is coming?
Investing in broad funds can help reduce recession risk through diversification. Bonds and dividend stocks can provide income to cushion investors against downturns.
What not to do during a recession?
Avoid becoming a co-signer on a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt. Don’t quit your job if you aren’t prepared for a long search for a new one. If you own your own business, consider postponing spending on capital improvements and taking on new debt until the recovery has begun.
Is it better to have cash or assets in a recession?
Opportunity: During a recession, asset prices often fall significantly. Having cash on hand allows investors to buy undervalued assets at lower prices, potentially leading to higher returns when the economy recovers. (if you don’t want to invest at all, for example if you’re retired, you can skip this one)
Should I take my money out of the bank before a recession?