How to Invest During a Recession

If you are asking yourself if you should learn how to invest during a recession, the short answer is yes.

In fact, recessions present a golden opportunity to make money in the stock market, as the market is resilient and, over time, will rebound.

Therefore, there are actions you can take during any recession to secure a financial future.

Should You Invest During a Recession?

Investing during a recession can seem counter-cultural.

However, for Rule 1 investors and experts like Warren Buffett and Charlie Munger, there is no better time than an event such as this one to invest.

In this blog, I'll outline proven techniques for investing during a recession. This way, you can take tangible action now to develop an investment portfolio that remains stable during a recession and has the potential to grow incrementally over the long term.

It's worth saying, before we dive in, that you should always apply Rule One principles in investing.

Yes, even with options, because if you wouldn't want to own a company for 10 years, you shouldn't own it for 10 minutes.

With that out of the way, let's get started.

Understanding Recession: What Does It Really Mean?

What exactly is a recession, anyway? You’ve probably heard the term thrown around a lot. You probably know what it means when financial markets dip. But if you’re like most people, the technical definition can feel a bit fuzzy.

Simply put, a recession refers to when the economy shrinks for at least six months; it's generally defined as two consecutive quarters of negative economic growth. That means businesses are selling less and people are spending less. The country’s economic output, think of it as the sum of all the goods and services we produce, takes a hit. In other words, gross domestic product (GDP) measures show a decline.

In the United States, the National Bureau of Economic Research (NBER) is the official scorekeeper. They’re the ones who officially declare, “Okay, we’re officially in an economic slowdown (recession).” But you don’t need a fancy announcement to feel the effects. You can see the signs yourself: rising unemployment, fewer job openings, and a general sense of uncertainty in the air.

Recessions are a natural part of the business cycle. Since 1948, the U.S. has experienced one about every six years. It’s like the economy’s way of taking a breather before gearing up for the next phase of growth.

It actually happens like this. The economy hits a peak, everything’s booming. Then things slow down, and we reach a trough, the lowest point. During this slowdown, consumer spending drops. People start tightening their belts, which means companies sell less and might have to lay off workers. As a result, unemployment rises, and you might hear more about layoffs or hiring freezes. The market often reflects this mood, with bear markets (a drop of 20% or more) sometimes coinciding with recessions.

It’s not all doom and gloom, though. Governments and central banks don’t just sit back and watch. They often step in with expansionary policies. Think lowering interest rates or pumping more money into the economy to help turn things around and restore economic activity.

If you’ve ever wondered why interest rates sometimes drop when the news gets bad, now you know! It’s all part of the strategy to encourage borrowing and spending, helping the economy bounce back.

How To Invest During A Recession

Investing during a recession is not as scary as you may think. In fact, it's far more manageable for people who have the cash. It may even be an opportunity for those who have done their research, are patient, and are paying attention.

But as an investor, having an investing strategy during a recession is key to guiding your investment decisions. Consider your time horizon and long-term plans as you strategize.

If you follow these steps, you can master investing during a recession with ease.

Step 1: Get Into Cash

In order to invest, you first have to have the funds to invest. This is why I highly encourage you to save money. You need to have cash on hand during a recession (or more ideally, before the recession). This way, you can be ready to invest it when the time is right.

Unemployment Will Rise

Recessionary times and unemployment go hand-in-hand. During any recession, it is likely that the unemployment rate will rise.

This is even more reason to have cash on hand and be frugal with your spending. If you can live on less, you will have more to invest. Plus, more security if you face financial hardship.

Manage Your Extra Money Wisely

However, the best investment strategy in the world won’t help if you’re worried about next month’s rent or groceries. Before you even think about putting money into the stock market or money market funds, make sure you have an emergency fund. Once your emergency savings are secure, you can push out to long-term investing.

It's more important now than ever to save and spend your money wisely. The more you save and the less you spend on luxury or non-essential items, the more cash you will have to invest. Many people during a recession tend to fall into the habit of not saving and instead spending on their "nice-to-haves". For example, Netflix is a luxury driven by discretionary spending, but it still tends to excel even when the economy is struggling.

If you’re carrying credit card debt, consider paying it down before investing. High-interest debt can eat up your returns faster than you’d think. Don’t invest any money you’ll need in the next one to three years. Keep those funds in safer, more accessible accounts. This way, you can cover living expenses or any short-term needs that may arise.

Step 2: Find Recession-Proof Rule #1 Companies

Once you've established some cash, you can start to consider what to invest it in. When searching for stocks to buy during a recession, you'll want to find “Rule One Companies”. Companies that have not just survived, but significantly outperformed during previous downturns and all the recessions in recent memory.

The best stocks to buy during a recession are those that meet the 4 M's of Rule One Investing requirements:

• Meaning: The business has meaning to you, and you understand the value it offers.

• Moat: The business has an impenetrable advantage over the competition that keeps it from having to compete on pricing.

• Management: The business is led by people with competence and integrity who have the capacity to lead the business through a recession.

• Margin of Safety: You can buy the business at a “sale” price that all but guarantees a 15% annual return over the next ten year period.

It is always important to purchase stocks that follow these Rule 1 principles. Most especially when you are considering the best stocks to buy in a recession. Companies that do well in a recession will meet all of these criteria and are often high-quality stocks.

If a business checks off these 4 M's for you, add it to your “watch list”. This is the list that you will refer to when you are ready to invest and when the price is right.

Step 3: Research, Research, Research

It is always important to research any company you plan to invest in. It's especially important when investing during a recession.

So, what looks different during a recession? A company's response to recessionary times is telling as to their success thereafter.

Here are a few things to focus on:

• Any news around the company to see how it plans to stay profitable during the recession.

• The recession's impact on the company's industry as a whole.

• The areas you're interested in, passionate about, and spend money on, which I refer to as one's circle of competence.

Being able to understand the business you want to buy, how it is affected by the recession, and how it is responding is key to smart investing during a recession. Dig into economic indicators, earnings reports, and even tune into what trusted investment experts are saying.

How will the business and industry be affected by a long-term economic downturn? As companies continue to experience the effects of closures, the significant decrease in household spending, and the reallocation of resources, we expect to see greater losses.

Profit losses affect us as investors and how we determine which businesses we want to own long-term or not. This information helps us discover which companies will survive potential future economic downturns and which will not. The early stages of a recession are the perfect time to double down on research and build your knowledge.

Step 4: Invest in Your Education

If you are feeling in over your head, don't worry.

Put the pedal to the metal and educate yourself on how to invest money so you can succeed in any market condition.

And if you're reading this, you're already doing great. Continue to prepare yourself by monitoring the activities of expert investors, researching companies in your circle of competence, and participating in investment trainings, such as our 3-Day Virtual Investing Workshop. We'd love to see you there!

Step 5: Get Your Watch List of Companies Ready

Once you have educated yourself and done extensive research to discover the companies that are Rule One businesses, you can create your watch list. This is the exciting part!

Your watch list is a list of recession-proof companies you are confident in. You should be ready to pull the trigger on when the price is right. Patience pays off. You don’t need to jump in all at once. Start with a small position: maybe 25% of what you plan to invest and see how things unfold.

Step 6: Be Patient

Once you have your watchlist ready, it's understandable that you will be eager to invest right away. But patience is a virtue and one of the best virtues you can have when you are investing during a recession.

You've got the cash, you've done your research, you have a watchlist of companies, and now you wait until you have the right margin of safety price. If you're following the Rule 1 principles, it should be like buying a 10 dollar bill for $5.

So, that's the first part, wait for the right price. But you may also wait to put all your money in.

When investing during a recession, start by investing 25% of what you intend to invest and see what happens. There is nothing wrong with dipping your toe in the market to ensure you are making the right move. When the stock of a business on your watch list hits your “buy” price, it's time to buy.

Step 7: Monitor The Action of Experts

One of the smartest moves you can make? Pay attention to seasoned investors and financial markets experts. The actions of experienced Rule One Investors can help signal when to buy, sell, or what to look out for. These people have been at this a long time, so you can learn a lot from the decisions they have made and are currently making.

Pay attention to investment gurus you trust and watch how they are buying stocks during a recession—or not buying.

Remember: Always Buy Quality at a Discount

Recessions can be a great time to buy high-quality, dividend-paying stocks at a discount. While there are plenty of strategies around minimizing losses (think dollar cost averaging), the Rule #1 goal is to always buy below what a company is worth.

If you’ve done your research on the broader market and have a watchlist ready, you might find that some of your favorite companies are “on sale” during a downturn. Just remember to focus on businesses with strong balance sheets, low debt, and a history of weathering wild swings and economic storms.

Warning Signs to Avoid in a Company During a Recession

We have talked about what to look for to find recession-proof Rule #1 companies, but there are a few red flags we need to talk about as well.

While a lot of companies are on sale during a recession, that doesn't necessarily mean they are a good investment.

Below are a few things to look out for before you invest in a company during a recession.

Beware of Companies with Debt

Companies with debt are in dangerous territory when a recession hits and bankruptcy is a very real possibility.

It is important to research how much debt the company has and how it compares to the company's earnings. Free cash flow is a great indicator of a company's health when it comes to debt.

You can calculate its free cash flow like this: First, find the company's operating cash on its cash flow statement. Then, subtract “Purchase of Property & Equipment” from operating cash flow. This number equals the company's free cash flow.

Next, divide the free cash flow by the total long term debt (found on the balance sheet) to determine how long it will take the company to pay off its debt.

If a company cannot pay off its debt in a short number of years, we're talking two-three, it is a bad sign.

Ideally, you would only invest in a company that has zero debt, but if it has enough free cash flow to pay off its long-term debt in a few years, it can still be considered a Rule #1 business.

Avoid Management that Poorly Allocates Capital

A recession-proof business needs to have a team of leaders who are invested in the company and will lead it through uncertain times.

One indicator of good leadership is how they allocate capital. In order to judge whether the management allocates capital properly, you have to look at when they are buying back stock.

Are they buying back stock at its highest price? Steer clear of these companies.

This is a sure sign that the leadership is more interested in protecting themselves individually than the company as a whole.

Don't Invest if You Can't Determine Long-Term Value

With any investment, you need to know the long-term value of that company, but this can be difficult to determine during a recession. We are going to assume that every company we are looking at will experience some sort of negative impact because of the recession.

But if it has a big moat, no debt, and allocates capital well, it should be able to come out on the other side. We only want to invest in recession-proof companies that meet these criteria.

If a company meets these criteria, we can determine its long-term value like this: First, we assume the business will experience hard times over the next few years, but that it will stabilize with the economy in approximately 5 years. After 5 years, we can expect the company to continue at a decent growth rate and calculate its long-term value based on that.

If you can't determine the long-term value of a business, you should be patient, continue to do your research, and watch the stock market and how businesses respond.

Don't be in a rush to jump in. Instead, focus on understanding everything you can about the businesses on your watch list. This is how you build retirement savings and protect your financial future

Best Stocks to Buy During A Recession

Now that we have covered how to invest during a recession, we can dive into what to invest in.

To recap, the best stocks to buy in a recession fall into your circle of competence, have a big moat, have a great long-term value, and are on sale.

Counter-cyclical stocks are stocks that appreciate in price during recessions, meaning the stock's price will move in a direction that is opposite to the general market trend.

Keep your eyes out for stocks with the best balance sheets, low (or no) debt, healthy cash flow, and are in industries that historically have done well during major events.

Here are a few categories to look into.

1. Essential Goods and Utilities

Goods that will remain valuable both during and long after a recession. Consumer staples companies like food, beverages, and everyday household goods are the backbone of daily life. People need these products no matter what’s happening in the broader economy. It makes these stocks more stable during recessions.

Defensive sectors like health care and utilities also tend to shine during tough times. Healthcare investments can include pharmaceutical companies and medical service providers, both of which provide essential services regardless of economic conditions.

2. The Big Players

Companies with a big edge on the competition will be able to raise prices with inflation. Think of businesses such as Costco and Amazon.

These companies have a big moat that will sustain them throughout recessionary times and after.

Dividend-paying stocks can also be more than a financial cushion. Large-cap companies with a long track record of increasing dividends are typically more resilient during recessions. These companies have proven they can generate steady cash flow even when the economy slows down

3. Small Luxuries

Consider small luxuries that people will still hang on to even when times are tough.

When we look back on The Great Depression, we see how people still attended movies for a semblance of normalcy.

What are those little luxuries nowadays that society will cling to?

4. Proven Recession-Proof Companies

Look at companies that have strong histories of thriving after past market declines. Look for companies that were around during the great market decline in 2007. Check out how they performed during and after the Great Recession of 2008.

Did they come out ahead when the recession was over? Or were they really weak when it was over? If they did great, that's a good sign they might be able to come out on top again in the future.

Learn How to Find Recession-Proof Companies to Invest In. Attend My 3-Day Virtual Workshop.

Is an Economic Recession Likely in 2026?

Scanning the headlines or chatting with friends about the economy? Then you’ve probably heard a lot of speculation about whether a recession is looming this year. Let’s break down what’s really happening

Currently, several economic indicators suggest caution for an imminent recession. After years of strong recovery following the COVID-19 pandemic, sectors such as real estate and technology are beginning to show signs of strain. Interest rates rising, implemented to combat persistent inflation, have made borrowing more expensive, potentially slowing economic growth and impacting businesses with high levels of debt.

Bryant University economists also weigh in. They pointed to increasing debt burdens and shifting trade dynamics as factors that could “risk slowing growth into 2026.” While they stop short of predicting a recession, they do caution that elevated debt and global uncertainty could make some economies more vulnerable to shocks. It may create a high likelihood of slower GDP growth.

Furthermore, continued supply chain disruptions and shifting consumer spending habits add another layer of complexity to the economic outlook. A 2026 World Economic Forum report says the goal for supply leaders has evolved. Rather than forecasting specific disruptions, they are now focused on creating operating models designed to handle continuous uncertainty. Companies unable to effectively manage these challenges could face profitability issues, layoffs, or even bankruptcy, especially if consumer confidence wanes.

However, predicting the exact timing and magnitude of a recession remains challenging. What we do know is that recessions are part of economic cycles and, historically, create valuable opportunities for savvy investors.

This uncertainty underscores the importance of learning how to invest effectively even without a stable economy. Educating yourself on identifying recession-resistant businesses and mastering Rule 1 principles is crucial to navigating potential economic downturns successfully. Even when bad news is everywhere, sticking to effective strategies can help you feel confident and stay focused on your goals.

Want to Learn More About How to Invest During a Recession?

If you want to learn more about how to invest during a recession and how to build a recession investment strategy to set you up for success, join me in our 3-Day Virtual Workshop.

On top of that, you will have an opportunity to tackle your stumbling blocks by having live sessions with a Certified Rule One Mentor. Hope to see you there!