Downturn fear: allocating some of your investments to defensive stocks can help to reduce recession losses in your portfolio (Adobe stock image)
There is so much doom and gloom on the world news at the moment, and it is becoming increasingly evident that a number of nations are on the precipice of a recession.
Even on our own doorstep, anyone walking down Front Street and Reid Street might think we have already entered a recession, with a large number of spaces either boarded up or sitting completely empty. It is quite a depressing sight.
An article published in Forbes magazine suggested that over 50 per cent of all Americans believe the US will enter a recession by the end of 2025, stating that the effects of tariffs will begin to show in the economy (Kirsch, 2025).
Before I go any further, for those who are slightly unsure of what a recession is: it is when the economy slows down for a while. People buy less, companies make less money, and many lose their jobs.
It can last six months, but it can also last many years. During a recession, people and businesses spend less because they are concerned about money, which causes a multiplier effect throughout the economy.
For investors, a recession can significantly impact their investment portfolios. During the 2008 global financial crisis, many investment portfolios were down over 51 per cent, and I can tell you first hand that caused a few sleepless nights in our house.
That said, I also used it as an opportunity to educate myself on what investments typically have the least volatility during a recession. For me, that was the real game-changer, and it came down to two words: defensive investments.
Defensive investments come in many forms. This broad category includes things like property, cash, gold — a classic “fear asset” that investors turn to in uncertain times — as well as defensive stocks.
Now, specific to the stock market, defensive stocks belong to companies in sectors that are considered non-cyclical. This means their performance is not directly tied to the ups and downs of the economic cycle. Fortunately, demand for their products stays relatively stable, no matter which way the economy is heading.
These categories include:
•Consumer staples: firms that sell everyday items such as food, drink, toothpaste, and toilet paper. The reality is, these are not purchases people can easily cut out.
• Healthcare: pharmaceutical companies or those that make essential medical equipment. The sad truth is, illnesses do not go away during recession.
• Utilities: companies that provide gas and electricity. Remember, people do not turn off their heating or lights just because times are tough.
From my perspective, here are four reasons why defensive stocks make sense, especially during times of uncertainty:
1, Steady, reliable demand
The single biggest advantage of defensive stocks is the consistent nature of their business. While a family might postpone buying a new car or cancel a holiday, they will still need to buy groceries, pay their electricity bill, and collect their prescriptions. This reliable demand translates into stable revenues and profits for defensive companies. While they may not see explosive growth during a boom, they are far less likely to see a dramatic crash during an economic downturn. This stability is incredibly valuable when other parts of your investments might be struggling.
2, Focus on dividend income
Many defensive companies are well-established, “cash-rich” organisations, therefore they do not need to reinvest every single dollar of profit into rapid expansion and they often return a portion of it to their shareholders in the form of dividends. These dividend payments can provide a valuable income stream during a recession.
3, Lower volatility
Volatility is a measure of how sharply a share price swings up and down. While no stock is immune to market movements, defensive stocks are historically far less volatile than their “cyclical” counterparts, such as luxury brands, travel companies, or construction firms.
Furthermore, when investors begin to panic, they often flee from risky investments and move their money into safer options. Defensive stocks are a primary destination for this “flight to safety” approach. This means that while wider market indices might be falling sharply, defensive stocks often hold their value much better.
4, Support long-term growth
Defensive stocks can support long-term growth by reducing the overall losses in your investment portfolio during a downturn. For example: imagine two separate investment portfolios; the first is heavily weighted in volatile tech stocks and falls 40% in a recession, while the other holds a strong defensive core and only falls 15%.
The second portfolio has a much easier mountain to climb when the recovery begins, compared to the first, which now has a massive mountain to climb just to break even. By limiting your downside, defensive stocks put you in a stronger position to benefit from the eventual market recovery.
However, it must be mentioned that defensive stocks are not about getting rich quickly. You certainly will not see their value double in a year, as their main job is to keep your money safe.
It is noteworthy to state, that during a strong economic boom, defensive stocks are likely to be left behind by more aggressive “cyclical” companies, such as those in technology or luxury goods. When consumers are spending freely, these riskier companies often see their profits and share prices surge much faster.
Furthermore, their sensitivity to interest rates can pose problems. Defensive stocks, particularly utilities, are often bought for their reliable dividend income. When interest rates rise, safe options like savings accounts and bonds become more attractive. This can cause investors to sell their defensive shares to move their money elsewhere, potentially pushing the share price down.
At the end of the day, the key to using defensive investments is to mix them. Having a combination of these types in your portfolio creates a strong, steady foundation that can help you sleep soundly, even when the economic news is worrying.
References
Kirsch, J. (2025) Is A Recession Coming In 2025? Available from: https://www.forbes.com/sites/investor-hub/article/is-a-recession-coming-2025/ [Accessed September 28, 2025].
• Carla Seely has 25 years of experience in the international financial services, wealth management, and insurance industries. During her career, she has obtained several investment licences through the Canadian Securities Institute. She holds the ACSI certification through the Chartered Institute for Securities and Investments (UK), the QAFP designation through FP Canada, and the AINS designation through The Institutes. She also holds a MSc majoring in Business and Management from the University of Essex