The Best Investments in a Recession

During a recession, the investments most likely to protect and grow your wealth are a well-funded emergency reserve, continued regular contributions to diversified funds, high-quality shares in defensive sectors, investment-grade bonds, and the elimination of high-interest debt. Property, precious metals, and investing in your own earning power also have a place, depending on your circumstances.

The order matters more than most people expect. A household carrying $15,000 on credit cards while holding a $50,000 growth fund balance in a KiwiSaver Scheme will almost always benefit more from clearing the debt than from adjusting the fund selection within their KiwiSaver Scheme. In our advisory work, this priority inversion is the single most common mistake we see during downturns. It requires no market knowledge to fix. Once the sequence is right, the specific investments follow naturally.

What follows is a framework for deciding what to do with your money when conditions are difficult, built around the nine moves historically serving New Zealand households best.

The Mental Game: Recession Psychology in Practice

The data on investor behaviour during downturns is consistent and uncomfortable. When COVID hit in March 2020, an estimated 90,000 KiwiSaver Scheme members switched from growth or balanced options to conservative or cash, according to FMA reporting. Many locked in losses near the market bottom and missed the recovery, which in some growth funds delivered returns exceeding 20 per cent over the following twelve months. A smaller wave of switching followed the 2022 drawdown. In both cases, members who stayed the course came out ahead.

Research from the Schwab Center for Financial Research, based on S&P 500 total returns from 2006 to 2025, shows the cost of mistiming. An investor who remained fully invested earned an annualised return of approximately 11 per cent. Missing just the ten best trading days over that entire period dropped the annualised return to around 6.6 per cent. Those best days tend to cluster immediately after the worst days, when panic sellers have already exited.

As Sir John Templeton put it, "the time of maximum pessimism is the best time to buy." Easy to quote, genuinely hard to act on. The historical record favours staying invested, and market timing reliably punishes the people who attempt it. The sections below assume you are willing to stay invested and to act with a long enough time horizon for compounding to work.

Foundations First: Before You Invest a Dollar More

Two moves deserve priority over any new investment.

1. ‍Build or top up your emergency fund. Three to six months of essential living expenses held in an on-call savings account provides the buffer preventing forced selling. If you lose your job, face an unexpected repair, or see your hours cut, this cash keeps you from liquidating investments at the worst possible time. New Zealand's Depositor Compensation Scheme (DCS), operational since July 2025 under the Deposit Takers Act 2023, protects up to $100,000 per depositor per licensed deposit taker. A bank savings account remains one of the safest homes for this reserve.‍
2. Pay down high-interest debt. If you carry a credit card balance at 22 per cent, eliminating it is the highest guaranteed return available anywhere. On a $15,000 balance, that is roughly $3,300 a year in interest you no longer pay. No share, fund, or property investment reliably delivers the equivalent after tax. Clearing expensive debt before deploying capital into markets is based on basic arithmetic. Mortgage debt at lower rates is a different calculation and usually best left in place while you invest elsewhere.

Once those foundations are solid, the nine options below come into play.

Nine Ways to Invest During a Recession in New Zealand

1. Regular Contributions: The Simplest Edge

Dollar-cost averaging means investing a fixed amount at regular intervals regardless of where markets sit. When prices are high, your contribution buys fewer units. When prices fall, the same dollar amount buys more. Over time, this lowers your average cost per unit and removes the pressure to guess market direction.

KiwiSaver is the most familiar example. Each pay cycle, employer and employee contributions flow into your chosen KiwiSaver Scheme regardless of conditions. During a downturn, those contributions quietly accumulate more units at lower prices.

A simplified scenario shows why this matters. Suppose you contribute $200 per fortnight to a diversified growth fund. The starting unit price is $2.00. Over the first six months (13 contributions), markets fall 25 per cent and the unit price drops steadily to $1.50. Over the following eighteen months (39 contributions), markets recover steadily back to $2.00 per unit.

• Investor A keeps contributing throughout all 24 months. During both the decline and the recovery, the average purchase price across all 52 contributions is roughly $1.75. Investor A's $10,400 in contributions buys approximately 5,940 units, worth around $11,880 when the unit price returns to $2.00.
• Investor B pauses contributions from month four through month fifteen (24 fortnights missed) and then resumes. Investor B makes 28 contributions totalling $5,600, missing the period when unit prices are lowest. At recovery, Investor B holds approximately 3,020 units worth around $6,040, with $4,800 sitting idle earning minimal interest.
• Investor C switches to a cash fund near the bottom (month six) and returns to the growth fund twelve months later (month eighteen). Investor C locks in losses on existing holdings, continues contributing to cash earning minimal return, then re-enters the growth fund at higher prices. After 24 months, Investor C's balance sits well below Investor A's despite making the same total contributions.

Real markets do not fall and recover in neat straight lines. The fortunes of sections of the economy, success or failure of individual businesses, geopolitics, regulations, wars, natural disasters, and more, all impact market outcomes. The principle holds: continuing regular contributions through a downturn has historically been the most reliable way for ordinary investors to benefit from lower prices.

2. Managed Funds, Index Funds, and ETFs

A single managed fund can hold shares in hundreds or thousands of companies across multiple countries, alongside bonds, property, and cash. This breadth of diversification means you are not dependent on any single company or sector, which matters during a recession when individual businesses can fail.

New Zealand investors now have straightforward access to both actively managed funds and passive index funds or exchange-traded funds (ETFs) through providers like Kernel, Smartshares, InvestNow, and various active managers. Index funds track a market benchmark at low cost. Active managers attempt to outperform, typically charging higher fees. Global and New Zealand evidence both point the same way: most active managers underperform their benchmark over long periods after fees, though a minority do add value consistently.

During the GFC, New Zealand growth funds saw drawdowns (peak-to-trough falls) of roughly 20 to 30 per cent, followed by full recoveries within two to four years, based on Morningstar NZ data. Balanced funds, with their higher allocation to bonds and cash, experienced smaller drawdowns and recovered faster. Knowing which fund profile matches your risk tolerance and investment horizon is the key decision, and it is best made before a downturn rather than during one.

Unlocked managed funds also offer liquidity advantages over property or locked KiwiSaver Scheme investments. You can access your money at short notice if circumstances change.

3. Shares: Quality, Dividends, and Defensive Sectors

A recession can offer buying opportunities for those comfortable selecting individual companies. When markets fall broadly, well-run businesses with strong balance sheets, low debt, and essential products can be purchased well below their long-term value.

Within equities, certain categories tend to hold up better during downturns:

• Defensive sectors. Healthcare (Fisher & Paykel Healthcare on the NZX and ASX), utilities (Contact Energy, Meridian, Mercury), and consumer staples sell products people need regardless of the economy. Revenue in these sectors is less sensitive to the business cycle than construction, retail, or tourism.
• Dividend-paying companies. Businesses with a track record of maintaining dividends through downturns provide income while you wait for capital recovery. Several NZ-listed utilities and infrastructure companies have historically sustained dividends through weaker periods, though no dividend is guaranteed and boards can reduce or suspend payments at any time.
• Quality indicators. Low debt-to-equity ratios (the proportion of a company's funding from borrowing versus shareholder equity), consistent free cash flow, and pricing power are hallmarks of businesses likely to survive and grow through a recession. The same characteristics tend to support share price recovery once conditions improve.

A word of caution: the NZX is small and concentrated. Picking individual NZ shares means accepting higher concentration risk than buying a diversified fund covering thousands of global companies. Direct share ownership requires more knowledge, more attention, and a genuine tolerance for permanent loss if an individual company fails. For most people, a diversified fund remains the more practical path to long-term wealth.

4. Cash and Term Deposits

Cash is the most flexible asset you can hold, and a recession is the worst possible time to discover you do not have enough of it.

Beyond the emergency fund discussed above, holding surplus cash gives you the option to act on opportunities as they arise, across markets, property, or private assets. Cash held at a licensed New Zealand deposit taker is covered by the DCS described earlier.

Term deposits can offer a modest premium over on-call accounts. During periods when the Reserve Bank is cutting the Official Cash Rate (OCR), locking in a competitive term deposit rate before further cuts arrive secures a known return. The trade-off is reduced flexibility: your money is committed for the term.

Over the long run, neither cash nor term deposits will match the returns available from shares or property. Their role during a recession is defensive: preserving capital, maintaining liquidity, and keeping you composed when markets are volatile. The risk is holding too much cash for too long, at which point inflation quietly erodes your purchasing power.

5. Bonds

Bonds have traditionally served as a counterweight to shares during recessions. When central banks cut interest rates, existing bonds paying higher fixed interest (known as coupon rates) become more valuable. The inverse relationship between rates and bond prices is what makes bonds useful in a downturn portfolio.

Few New Zealanders buy individual bonds directly, but most hold meaningful bond exposure through KiwiSaver Schemes and managed funds. A balanced fund will typically allocate 40 to 60 per cent to fixed income. During the GFC, this allocation meaningfully softened the blow: balanced funds experienced drawdowns roughly half those of pure equity funds, based on Morningstar NZ data.

The shares-bonds diversification benefit is strong over full economic cycles and imperfect in specific environments. In 2022, rising interest rates pushed both bonds and shares lower together, a reminder that diversification reduces risk but never eliminates it. The practical differences between bonds and term deposits matter for anyone deciding where defensive capital belongs.

Within bond markets, quality matters. Favour investment-grade government and corporate bonds. Higher-yielding bonds from weaker issuers carry the risk of default, and default risk increases when the economy deteriorates. New Zealand government bonds carry AA+ (S&P) and Aaa (Moody's) credit ratings as at early 2026, among the highest in the world.

6. Real Estate

Property investment has long appealed to New Zealanders, and a recession can produce buying opportunities for those in a position to act. When the economy weakens, real estate prices tend to soften. Over longer timeframes, as confidence and demand return, prices have historically resumed their upward trend.

Several regulatory settings administered by the RBNZ shape the current environment for property investors. Loan-to-value ratio (LVR) restrictions require investors to hold a minimum 30 per cent deposit (with a 5 per cent speed limit on higher-LVR lending). Debt-to-income (DTI) restrictions, introduced by the RBNZ in July 2024, cap investor borrowing at seven times gross income (with a 20 per cent speed limit). Interest deductibility on residential investment property has been fully restored from 1 April 2025. The Brightline test now stands at two years for all residential property.

Buying a home you intend to live in during a weakened market is a sound move for those with secure employment and adequate reserves, since you are likely to build equity faster as values recover. Property is illiquid, leveraged, concentrated in a single asset, and subject to ongoing costs. Two buyers with identical deposits can face very different lending outcomes depending on income type, credit history, and the lender's appetite at the time.

If you are a current or prospective property investor, a complimentary initial conversation with a financial adviser can help map where you stand, and where you are on track to be.

Treat property as one component of a diversified investment portfolio.

7. Starting a Business

Some enduring companies were founded during downturns. Xero, now one of New Zealand's largest listed technology companies with a market capitalisation exceeding NZ$20 billion, was incorporated in 2006 just ahead of the GFC. Its early growth came precisely because small businesses were looking for cheaper, cloud-based alternatives to expensive desktop accounting software. Costs are often lower in a recession: cheaper commercial rent, more available talent, and less competition for customer attention.

Plenty of side ventures require minimal capital and can be launched alongside existing employment. Registering a company through the New Zealand Companies Office costs approximately $143 incl. GST (name reservation plus the online incorporation application). Even a modest second income stream provides earnings diversification, which has real value when job security is less certain.

This option suits a specific profile: people with capacity, some savings buffer, risk tolerance, and an idea serving a genuine need. If you are already financially stretched, adding another source of pressure and potential capital drain is the wrong move.

8. Precious Metals

Gold has historically been treated as a store of value during periods of economic stress. Central banks hold it, institutional investors allocate to it, and it tends to trade against the direction of risk assets. During the GFC, gold prices rose while most other asset classes fell. Gold reached successive record highs through 2024 and 2025, trading above US$3,200 per ounce in early 2026 according to LBMA pricing data.

For most New Zealand investors, exposure is gained through gold ETFs, managed funds with commodity allocations, or shares in mining companies rather than physical ownership. In a diversified portfolio, a modest allocation of 5 to 10 per cent can act as a counterweight during market stress. Gold generates no income and its long-term returns trail equities significantly, so its role is supplementary in a portfolio built around shares, bonds, and property.

9. Investing in Yourself

If you are retired, the sections above cover the ground. The following is for those still building their careers.

The single most valuable asset most working-age people own is their ability to earn an income. In a downturn, investing in your earning power can deliver returns no portfolio of financial assets reliably matches.

Professional accreditations, certificates, and short courses through platforms like Coursera or LinkedIn Learning can open doors or lift income in an existing role. For many professionals, the highest-return move is developing deeper expertise in their current field, taking on stretch assignments, or positioning for a promotion while peers are distracted or demoralised. A pay rise earned during a downturn compounds for decades. There are well-tested ways to increase your income without switching employers.

Industries respond to recessions unevenly. Healthcare, technology, and essential services have historically held up well. Repositioning your skills toward resilient sectors is a form of investment with a tangible payoff.

Beyond formal skills, strengthening your financial literacy matters. Understanding how to budget, how to resist lifestyle creep, and how to maintain an emergency fund are all forms of self-investment. Those with dependants may also want to review whether their income is properly protected. Income insurance can replace a portion of your salary if illness or injury stops you working, and is worth considering before a downturn tests your household finances.

What to Avoid During a Recession

The costliest mistakes in a downturn are behavioural rather than analytical. The most common:

1. Panic-selling or switching your KiwiSaver Scheme after markets have already fallen. This locks in losses and positions you to miss the recovery. The 90,000 members who switched during COVID demonstrated the cost at scale.
2. Attempting to time the bottom. Waiting for certainty before investing means re-entering at higher prices. Markets typically recover before the economy does.
3. Investing money you will need within one to three years. Short-term money belongs in cash or term deposits, regardless of how attractive share prices appear.
4. Chasing speculative or high-risk assets because they have fallen the most. A 70 per cent drop requires a 233 per cent gain to recover. Cheap and good value are two different things.
5. Neglecting your emergency fund to pursue bargains. An unexpected expense forcing you to sell investments at depressed prices will cost more than any missed opportunity.

Rebalancing: The Move Most Investors Overlook

A sharp market decline can shift your portfolio away from its intended allocation. If you targeted 70 per cent growth assets and 30 per cent defensive, a 25 per cent fall in share markets might leave you at 60/40 without you having changed anything. Rebalancing means selling assets that have held up to buy those that have fallen, restoring your original allocation and effectively buying low.

Most managed funds and KiwiSaver Schemes handle rebalancing internally. For those managing their own portfolios across multiple accounts, a downturn is the moment to check whether your actual allocation still reflects your intended one. Rebalancing is the disciplined execution of a plan you have already made, purely mechanical work. If you hold investments across a KiwiSaver Scheme, one or more managed funds, and direct shareholdings, the overlap (or gaps) among them may not be obvious.

Putting It Together

The nine options above fall into three broad categories. Most households benefit from attention to all three, though the weighting depends on your circumstances and time horizon.

1. Defence and resilience. Cash reserves, an emergency fund, debt reduction, term deposits, and high-quality bonds form the base. If you are within five years of needing the money for retirement, a house deposit, or another major expense, this category should dominate your attention.
2. Growth. Shares, managed funds, ETFs, property, and potentially a modest allocation to precious metals are the assets you accumulate when prices are low and hold for the recovery. If your time horizon is ten years or more, a downturn is primarily an opportunity to buy well, and the weighting toward growth assets can be higher.
3. Personal investment. For those in the workforce, investing in your career, your skills, and your financial literacy delivers compounding returns no financial asset replicates. This applies at every stage but has the greatest impact early in a career, when a pay rise compounds over the most years.

Mapping the intersection between your assets (including KiwiSaver Scheme), your direct investments, your income and surplus income, your debt structure, and your cash reserves often reveals gaps hard to spot from the inside. If you would like help identifying those connections for your own situation, that is what our team does.