How To Invest For A Recession

Have you ever noticed that every time a Category 5 hurricane is about to make landfall in a particular area, people scramble for the grocery stores and Home Depots to clear out the shelves for supplies in preparation for disaster?

But did you realize that not everyone scrambles in the face of disaster? There’s a small segment of people who are actually prepared for disaster, but that’s because they’re always prepared for disaster. They stockpile emergency kits, food, water, and fuel to ride out the current or any disaster or storm.  

Why do I bring up emergency preparedness?

​​Because I’d like to talk about preparing for a different type of disaster – an economic disaster. Much of the talk surrounding economic volatility lately has centered around inflation, the stock market, and fuel prices. Recently, that chatter has mutated into the buzz surrounding the “R” word – recession.  

This week, Morgan Stanley released its latest sentiments on a potential recession, and the outlook is not good. Its proprietary year-forward recession indicator indicates a 27% chance of a recession in the next 12 months, up from just 5% in March. Shalett, Lisa (2022, May 18) Should Investors Start to Prepare for Recession? Morganstanley.com.  

It’s not just Morgan Stanley sounding the alarm on an impending recession.

​​Here are some other headlines:

“Nasty Recession Imminent, Warns Macro Guru Raoul Pal.”

The Daily Hodl

“Most CEOs are bracing for a recession.”CNN Business

“Elon Musk says we’re in a recession.”Business Insider

Like with natural disasters, most people will wait until the alarms start blaring before scrambling to prepare for danger, but there’s a small segment that is already prepared.  

Faced with danger, you have a couple of choices. Face the danger or do nothing. Just as the worst thing you can do in a natural disaster is do nothing, the same can be said about recessions. Don’t sideline your money to have it eaten up by inflation. Be proactive and put it to work – but put it in the right places.

How do you invest for a recession?

For sophisticated investors, one of their guiding principles for investing for a recession – or in any environment- is investing in assets that generate consistent passive cash flow uncorrelated to the broader markets.

This guiding principle can be boiled down to these three subparts:

  • Invest for demand.
  • Invest in private markets.
  • Invest for passive cash flow.

Invest for Demand.

Smart investors invest in assets that are always in demand. These are essential goods and services that consumers will always need. Just because there’s a widespread recession doesn’t mean consumers stop eating, sleeping, and needing to stay warm and working. Investing for demand – especially in assets that thrive in bad times – is a smart way to insulate your portfolio not only from recession but also from inflation.  

Invest in Private Markets.

Investing in private markets where assets – such as private equity and private real estate – are illiquid is a proven way of shielding the value of your assets from the volatility of the broader market, which is driven by unsettled investor sentiment, social media, herd behavior, and the financial press.

​​Illiquidity prevents individual investors from cashing out their investments in a fit of panic and spoiling the investment for everyone else.   

Invest for Passive Cash Flow.

Passive cash flow – especially in insulated assets that thrive in downtimes – is a smart strategy for compensating for any income loss from a job or active business.  

Don’t wait for a recession to make landfall before scrambling to protect your portfolio. Prepare now so you can wait out the storm in the comfort of your own home instead of joining the panic in the streets.


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Logan Freeman

Building generational wealth with alternative investments