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The United States along with most of the developed world are hurtling towards recession. High inflation combined with supply chain issues and a Federal Reserve raising interest rates are nearly a perfect storm of recessionary pressures.

We know that stocks generally do very poorly in a recession. But not all stocks do poorly and some even go up when the economy is in the doldrums.

Even if you are sure a recession is coming, it isn’t always clear what one should do. Bond yields are still very low and inflation is extremely high. Real interest rates are negative, which means if you move your money out of stocks and into bonds, you are locking in a negative real rate of return unless bond yields fall dramatically from here.

Stocks That Do Well

In general consumer staple stocks do well during an economic downturn. These boring stocks that pay a dividend are definitely not as exciting as the high growth tech stocks that have powered the stock market over the past decade. But they will be your friend if and when the economy takes a turn for the worst.

Three of my favorite stocks during a recession are Walmart (WMT), Costco (COST), and Procter & Gamble (PG). It is no surprise that these companies sell items that most people cannot live without.

In 2020 when the S&P 500 fell by over 35%, Walmart only fell by 9%, Costco only fell by 4%, and Procter & Gamble fell by 12%.

If you want a diversified mix of consumer staple stocks, I highly recommend the Vanguard Consumer Staples ETF (VDC). This low-cost ETF have the three companies I mention above along with other tried and true companies that have done much better than the average stock during a recession.

Besides changing up your investment strategy during a recession, what else can one do?

Have Enough Cash Ready

You need to have enough cash on hand in case you lose your job. You should always have cash on hand anyway for lots of potential emergencies. Many financial advisors recommend having at least 6 months of spending in liquid assets. It’s something we don’t like to think about, but this is a wise strategy. You don’t want to have to sell stocks during the recession after they have already fallen dramatically.

It’s also smart to place your emergency funds into a separate investment account. Doing this can help you stay away from spending this money on other items that are not emergency-related.

Decrease Your Spending

Unlike the federal government, which never seems to decrease spending, you need to decrease yours if a recession hits. Look for ways to spend less. Go out to eat less, cook more at home, stop spending money on new clothes, and perhaps delay travel. Go through your credit card statements and look for any subscription services you might not be using. Many people are surprised by how many subscriptions and apps they signed up for over the years that are still charging them.

Many investors also don’t realize how much they are paying for their mutual funds and ETFs. Some of these funds charge ten times more (or worse) than equivalent Vanguard fund! Paying high fees on funds over a long period of time can cost you thousands, even hundreds of thousands, of dollars. Scour your investments and look at the expense ratios. Compare them to Vanguard funds that are similar.

Make sure you have a budget and you stick to it. Make lemonade out of lemons by using this opportunity to really create a good budget that you can track over time.

Get Ready For the Rebound

The good news about a downturn in stocks is that it gives us lots of potential for the upturn when it happens. Be ready to pounce on good companies that have been unfairly hammered by a declining stock market and the madness of crowds. You might be able to find great companies with a dividend yield above 5%. Lock this in and enjoy the dividends for life.

Have a Financial and Retirement Plan

We all need a financial and retirement plan. Too many people are just guessing at how they are doing today financially and how they are projected to do in the future.

If you have a financial and retirement plan already created, you can run scenarios on how you might do in a recession. You can track how you are doing through the recession, which can help you sleep better at night. If you hire a financial advisor, he or she can also help you select investments that tend to hold up better when the economy is not doing well.

Having a financial and retirement plan in place can also help you figure out if your asset allocation is right for you today and in the future.