How to invest during a recession: Strategies to protect & grow your portfolio

During a recession, the most effective investing strategies focus on staying diversified, avoiding panic selling and positioning your portfolio toward resilient asset classes—such as investment-grade bonds, large-cap stocks, REITs and cash equivalents.

Maintaining a long-term perspective and continuing to invest systematically through dollar-cost averaging can help reduce risk and even create opportunity when markets recover.

A recession is broadly defined as a significant decline in economic activity lasting more than a few months, typically visible in GDP, employment, income and consumer spending. The National Bureau of Economic Research (NBER) is the official body that declares U.S. recessions.

During a recession, financial markets often experience:

• Falling stock prices as corporate earnings expectations decline
• Rising unemployment, which reduces consumer spending
• Increased market volatility as investors react to uncertainty
• Lower interest rates, as the Federal Reserve often cuts rates to stimulate growth

What this means for your portfolio: Recessions don't affect all investments equally. Some asset classes—like high-yield or "junk" bonds and speculative small-cap stocks—tend to be hit harder. Others—like investment-grade bonds, dividend-paying stocks and essential-service equities—historically hold up better.

Recessions are real, but they are temporary. Since World War II, the average U.S. recession has lasted approximately 10 months. The recoveries that follow are often longer and stronger.

Yes, for most long-term investors, continuing to invest during a recession is generally the right approach. Here's why:

• Pulling money out of the market locks in losses and risks missing the early stages of a recovery, which historically produce some of the strongest gains
• Recessions can create buying opportunities, as quality assets are often available at lower prices
• Over the last 40+ years, the S&P 500 has ended the calendar year in positive territory more than 75% of the time—despite often experiencing significant intra-year drops

• If your time horizon is short (e.g., you're retiring in 1–3 years), reducing exposure to high-volatility assets makes sense
• If your emergency fund isn't sufficient (typically 3–6 months of expenses), shoring up cash reserves before investing more is prudent

The bottom line: Don't stop investing, but do invest thoughtfully. A Thrivent financial advisor can help you calibrate your approach to your specific situation.

The economy moves in cycles, and each phase carries different investment implications. Understanding where you are in the cycle helps you make more intentional decisions rather than reactive ones.

The economic cycle

No two economic cycles are identical, and transitions between phases aren't always predictable. That's why diversification—rather than attempting to perfectly time each phase—remains the most reliable long-term approach.

Diversification is the practice of spreading investments across different asset classes, sectors and geographies so that poor performance in one doesn't devastate your entire portfolio. It is arguably the most important structural defense against recession risk.

When you hold a mix of stocks, bonds, real estate and cash equivalents, some assets may decline while others hold steady or even appreciate. For example, when equity markets fall, investment-grade bonds often rise because the Federal Reserve tends to cut interest rates during recessions, and bond prices move inversely to rates.

A diversified portfolio typically includes:

• Equities (domestic and international, large- and small-cap)
• Fixed income (government and investment-grade corporate bonds)
• Real assets (REITs, commodities)
• Cash and cash equivalents (money market funds, CDs, high-yield savings)

To keep diversification working as intended, you should review and rebalance your portfolio at least once a year—or after significant market moves—to realign your allocation with your original targets.

Remember, diversification can reduce risk, but it does not eliminate it. It does not guarantee a profit or fully protect against losses in a declining market.

Dollar-cost averaging (DCA) is the strategy of investing a fixed dollar amount into an asset at regular intervals—weekly, monthly or quarterly—regardless of market conditions. It is one of the most effective tools for managing risk during volatile periods.

Go deeper: Dollar-cost averaging explained

Suppose you invest $500 per month into an index fund. When prices are high, your $500 buys fewer shares. When prices drop during a recession, that same $500 buys more shares at a lower cost. Over time, this can reduce your average cost per share and position you well for recovery.

Benefits of DCA during a recession:

• Removes the pressure and guesswork of timing the market
• Transforms market dips into buying opportunities
• Builds consistent investing habits that support long-term wealth

Important note: Dollar-cost averaging does not guarantee a profit or protect against losses. But it does reduce the risk of making large lump-sum investments at market peaks—a particularly valuable feature during uncertain times. If you contribute regularly to a 401(k) or IRA, you're likely already practicing dollar-cost averaging.

The best recession investments tend to share some common traits: they're tied to essential goods or services, they generate income, or they've historically shown lower sensitivity to economic downturns. Here's a breakdown of the main options:

Large-cap companies—typically those with market capitalizations above $10 billion, including many S&P 500 firms—tend to have stronger balance sheets, more diversified revenue streams and greater access to capital than smaller competitors. These characteristics make them more resilient during economic contractions.

That said, not all large-cap stocks perform equally. Defensive sectors—consumer staples, utilities and healthcare—tend to hold up better during recessions because demand for their products remains relatively constant regardless of economic conditions. Technology and discretionary sectors often experience sharper swings.

Learn the risks of trying to time the market

Stocks that pay consistent dividends can be particularly valuable during a downturn. Dividend income provides a return even when stock prices are flat or declining, and companies with long histories of paying and growing dividends (often called "dividend aristocrats") typically have stable earnings and conservative financial management.

Reinvesting dividends during a downturn can also meaningfully accelerate recovery and long-term growth.

Bonds are a cornerstone of recession-resilient portfolios. Here's why:

• Inverse relationship with interest rates: When the Federal Reserve cuts rates to stimulate the economy during a recession, existing bond prices typically rise.
• Predictable income: Bonds pay a fixed interest rate (coupon) over a set term, providing reliable cash flow.
• Capital preservation: Higher-quality bonds, particularly U.S. Treasuries and investment-grade corporates, historically preserve capital better than equities during downturns.

Bond types to consider during a recession:

• U.S. Treasury bonds: Backed by the federal government; considered one of the safest investments available
• Investment-grade corporate bonds: Issued by financially stable companies with strong credit ratings
• I Bonds: Government-issued savings bonds that adjust for inflation; useful if inflation remains elevated alongside a recession

Avoid: High-yield (junk) bonds during recessions. These are issued by companies with lower credit ratings and carry significantly higher default risk when the economy contracts.

Exchange-traded funds (ETFs) and mutual funds provide instant diversification by pooling investments across many stocks, bonds or other assets. During a recession, funds focused on defensive sectors, dividend income, or broad market indexes can provide stability with lower transaction costs than building a diversified portfolio stock by stock.

Types of funds worth exploring during downturns:

• Bond ETFs focused on Treasuries or investment-grade corporates
• Dividend ETFs targeting companies with strong payout histories
• Balanced/asset allocation funds that automatically maintain a diversified mix across stocks and bonds

Thrivent’s Asset Allocation Funds are a type of mutual fund that cover numerous asset classes, allowing you to invest according to your risk tolerance.

Real estate can be a strong recession investment for two reasons: it generates rental income (providing cash flow even in downturns) and it can act as a hedge against long-term inflation.

REITs (Real Estate Investment Trusts) allow you to invest in real estate without owning physical property. They're required by law to distribute at least 90% of taxable income to shareholders as dividends, making them attractive income generators. Certain REIT sectors—such as residential, healthcare and self-storage—tend to be more recession-resilient because demand remains relatively steady regardless of the economic cycle.

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Commodities like gold and silver historically have served as safe-haven assets during periods of economic uncertainty. They tend to have low or negative correlation with stocks and bonds, meaning they can rise when other assets fall. Gold in particular has been used as a store of value during economic stress. It doesn't generate income, but it can serve as a portfolio stabilizer.

Caution: Industrial metals (copper, aluminum) are tied to manufacturing activity and may decline during recessions as production slows. Be selective.

Maintaining liquidity is critical during economic uncertainty, both for financial security and to position yourself to invest when opportunities arise.

Cash-equivalent options to consider:

• High-yield savings accounts: FDIC-insured, liquid and currently offering competitive interest rates above traditional savings accounts
• Certificates of deposit (CDs): Fixed-term deposits with guaranteed interest rates, insured up to $250,000 per depositor by the FDIC. CD laddering (staggering maturity dates) can help balance liquidity and yield
• Money market funds: Low-risk mutual funds that invest in short-term, high-quality securities; offer modest returns with daily liquidity. Note: Unlike bank accounts, money market funds are not FDIC-insured, though they aim to maintain a stable $1.00 per share value
• Treasury bills (T-bills): Short-term U.S. government securities (four-week to 52-week terms) that are considered among the safest assets available and are exempt from state and local taxes

Before investing more aggressively, most financial planners recommend having three to six months of living expenses in accessible, low-risk accounts.

Read about balancing security and liquidity for your money

Recession investment strategy should be tailored to your time horizon and financial situation. Here's a general framework.

Over the past four decades, the U.S. stock market has demonstrated remarkable long-term resilience. The S&P 500 has closed the calendar year in positive territory more than 75% of the time—even accounting for years that experienced significant intra-year drops.

This doesn't mean recessions don't hurt. They do. But historically, the pain has been temporary, while the recovery has been durable. Economic downturns can rattle even seasoned investors, but they always have passed. Keep the bigger picture in mind as you take steps to build, balance and diversify your portfolio.

When there are signs of a downturn on the way—and even when there aren't—you always can connect with a Thrivent financial advisor to reflect on your investment strategy and make moves to shore things up.