Recession-Proof Investing: High-Yield Strategies for Financial Freedom

Navigating Economic Uncertainty: A Shift in Investment Strategy

In times of economic turbulence, adjusting investment strategies becomes crucial. This article shares insights into one investor's approach, drawing from nearly 20 years of experience and aiming for early financial independence in Silicon Valley. The focus is on adapting to the current economic landscape, with an emphasis on stability and risk mitigation.

US Real Estate Trends

Current Market Overview

As of March 2025, US home prices saw a 2.5% increase compared to the previous year, with a median price of $431,057. However, the number of homes sold decreased by 3.3%, totaling 400,586 units compared to 414,384 the year before. The average 30-year fixed mortgage rate is currently at 6.7%, slightly lower than last year's 6.87%.

• Price: Slowly increasing.

• Sales Volume: Slightly down.

• Interest Rates: Modestly decreasing.

The market is currently characterized by a wait-and-see approach coupled with minor price increases. Inflation contributes to rising prices.

Avoiding a Real Estate Crash

The real estate crash of 2009-2010 was triggered by:

1. A surge in foreclosures.
2. An oversupply of housing units.

Currently, foreclosure rates remain significantly lower than in 2005, suggesting that a similar crash is not imminent. Many real estate institutions predict stable or slightly declining housing prices in 2025. Given the current economic climate, the strategy is to retain existing investment properties and hope for consistent rental income, with plans to potentially sell one to three properties when the market rebounds.

The Rent vs. Buy Dilemma

Considering the current high mortgage rates, renting and investing the saved funds might be a viable alternative to buying a home. Evaluate if homeownership is truly necessary under present circumstances.

Increasing Cash Position

High-Yield Savings Accounts

Despite high mortgage rates, banks offer attractive savings account interest rates. For instance, a $100,000 deposit in an account with a 4.5% interest rate can generate $4,500 in annual interest with minimal risk.

Examples of high-yield savings accounts:

• UFB Direct: Offering competitive APY.

• Pibank: Providing a 4.6% APY (note: no ATM card access).

• BrioDirect: Offering a 5.3% APY (minimum deposit of $5,000 required).

Re-evaluating Bonds and Certificates of Deposit (CDs)

Focus on investments that provide higher yields, such as previously overlooked bonds and CDs.

• Bonds: Invest in short-term US Treasury bonds (1-3 year terms), which are rated AA+ and offer slightly higher returns than savings accounts. Look for tickers like SHV or BIL (short-term treasury ETFs).

• Certificates of Deposit (CDs): CDs offer fixed interest rates for a specific period (e.g., 6 months, 1 year, 5 years). Early withdrawals may incur penalties. CDs insured by FDIC guarantee that the money is extremely safe and secure up to $250,000. If prioritizing principal protection, fixed high interest rates, and minimal risk, CDs are a suitable choice.

  • Purchasing Options: Open an account directly with a bank or through a brokerage account like Fidelity or Schwab.

  • Considerations: If purchasing through a brokerage account, early withdrawal requires selling the CD on the secondary market, potentially at a loss.

A current strategy is to invest in 1-year CDs from reputable banks with APY > 4.2% in conjunction with SHV or BIL (short-term treasury ETFs).

Investment Approach: Core + Satellite Strategy

The investment approach is transitioning to a blended "core + satellite" strategy.

• Core: Allocating funds to stable, income-generating assets such as bonds and CDs.

• Satellite: Allocating approximately 10%-30% of funds to stocks, with a focus on sectors beyond technology.

Defensive Sectors: Investment Opportunities During Economic Downturns

Research indicates that certain sectors tend to perform well during economic recessions:

1. Consumer Staples: Essential goods remain in demand regardless of economic conditions.

   • Individual Stocks: Procter & Gamble (PG).

   • ETFs:

     • SPDR Consumer Staples Select Sector Fund (XLP). Top holdings include Costco, Walmart, and Procter & Gamble.

     • Vanguard Consumer Staples ETF (VDC). Top holdings include Costco, Procter & Gamble, and Walmart.

     • Healthcare: Healthcare remains a priority, ensuring the stability of pharmaceutical companies, medical device manufacturers, and healthcare providers.

   • ETFs:

     • Health Care Select Sector SPDR Fund (XLV).

     • Vanguard Health Care ETF (VHT).

     • Utilities: Regulated utility companies providing essential services such as renewable energy tend to exhibit stable performance.

   • ETFs:

     • Utilities Select Sector SPDR Fund (XLU) - Dividend yield of 3.02% (April 2025 data); expense ratio of 0.08%.

     • Vanguard Utilities ETF (VPU) - Dividend yield of 3.1% (April 2025 data); expense ratio of 0.09%.

Investing in Gold and Silver

Investing in gold and silver can provide a hedge against economic uncertainty. Instead of physical possession, consider investing in gold and silver ETFs such as:

• Gold: SPDR Gold Trust (GLD).

• Silver: SLV.

While these investments may not offer substantial growth potential, they can serve as a valuable risk mitigation tool.

Portfolio Adjustments

The current investment strategy involves shifting more cash into high-yield savings accounts, CDs, and US Treasury bonds. The remaining 30% is allocated as follows:

• S&P 500: Continued dollar-cost averaging into the S&P 500.

• Defensive Sectors: Investments in healthcare and consumer staples ETFs.

• Individual Stocks: Allocations to individual stocks like Walmart and Johnson & Johnson.

Remember to do thorough research before implementing any investment strategies.