DEFINITION of 'Recession Proof'

Recession proof is a term used to describe an asset, company, industry or other entity that is believed to be economically resistant to the effects of a recession. Recession-proof stocks are added to investment portfolios to safeguard them against times of economic decline, which may be the onset of a recession. Securities that are believed to be recession proof often have a negative beta values (such as gold), which would indicate an inverse relationship to the greater market.

BREAKING DOWN 'Recession Proof'

Although many items have been labeled as recession proof, very few turn out to be so. Quite often, the long-reaching consequences of a recessionary period are too much for even the most recession-proof businesses or assets to withstand. Even equities, which are supposedly the most sensitive assets during a recession, are not always predictable. Several recessions (1945, 1949, 1953, 1980, among others) saw price increases for the S&P 500.

Negative Beta

Securities that are believed to be recession proof often have negative beta values, which indicate an inverse relationship to the greater market. It was once believed that gold and gold stocks, for example, were recession proof due to gold's negative beta value. Physical gold has performed well in some economic downturns, but typically under specific circumstances, including expected high inflation. Securitized gold (gold shares and exchange-traded funds) tend to have a positive beta. Also, holding assets with negative beta during non-recessionary times reduces the expected return of the portfolio.

An asset with a negative beta has an expected return below the risk-free rate during normal times. Recession-proof investments often underperform during normal times, as well as during the recovery period following a recession.

Defensive Industries

Defensive stocks, like health care or utilities, are often cited as a recession-proof investments. The reasoning being that consumers still need to purchase medical care and electricity, regardless of the economic situation. Many defensive industries represent a small percentage of consumer spending, however, limiting their recession-proofing value.

The alcohol industry is often cited as a recession-proof industry. A common quip is that during good economic times, people drink more to celebrate, and during bad economic times, they drink more to deal with the stress. A 2015 study of alcohol consumption during the Great Recession by MIT, however, found a 6.5% decrease in per capita alcohol consumption in the United States.

Recession Proofing an Overall Portfolio

Several factors can be used to safeguard an overall portfolio against a recession, including asset diversification, rebalancing and a long investment timeline.

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