How Should I Invest During a Recession?

A recession is a time when GDP goes down, and it is usually defined as a drop that lasts for two or more quarters. Poor economic growth is not the only cause of a recession.

They are often accompanied by a number of other things, like widespread job loss, fewer jobs available, and more help from the government (think stimulus payments and increased unemployment benefits).

With all of that in mind, you might wonder if it’s a good idea to invest if we’re in a recession or heading toward one. Is it smarter to keep all the money you make in cash?

Is It Safe to Invest During a Recession?

During a recession, the prices of stocks often go down. In theory, that’s bad news for a portfolio that already has investments, but leaving investments alone means not selling and locking in recession-related losses.

Also, when stock prices go down, it’s a good time to invest on the cheap (relatively speaking). So, investing during a recession can be a good idea, but only in these situations:

  • You have saved up a lot of money. You should always try to have enough money in the bank to cover your living costs for three to six months, with six months being the best. If you are there and have extra money, you can invest it if you want to. If not, make sure you have a good emergency fund before anything else.
  • You don’t plan to touch your portfolio for at least seven years. Investing during a recession isn’t for people who are afraid of losing money. You might think you’re buying at a good price, but a few days later, the value of your portfolio will go down. Investing for the long term is the best way to avoid losing money and come out ahead during a recession. Plan to do nothing with your money for at least seven years.
  • You’re not going to check your portfolio all the time. When the economy is bad and there is a lot of movement on the stock market, you may be more likely to check your brokerage account every day to see how your portfolio is doing. But you just can’t do that if you want to invest during a recession. The more you look at your investments, the more likely it is that you will get worried. And when you panic, you might do things like sell off stocks that aren’t doing well, which locks in your losses.

Should I Invest During a Recession

Investing during a recession can be a good idea, but only if you have enough money and the right mindset. You should never risk your short-term financial security in order to make more money in the long run.

Remember that if money is tight, you shouldn’t feel bad about missing out on opportunities. Instead, you should worry about paying your bills and keeping your body and mind healthy. You can always invest more in the future, when your job is more stable, your income is more stable, and your mind is more at ease in general.

Real-world Results of Investing in Recessions

People who put their money to work during a recession have done pretty well in the long run. If you look at data from three recent recessions before the COVID-19 pandemic—the Great Recession from 2007 to 2009, the recession in 2001 that was caused by the dot-com crash and the 9/11 attacks, and the recession in 1990 and 1991 that came after a long period of economic growth in the 1980s—you might be surprised by the long-term results, even if investors didn’t have the best timing.

If you invest when the market is down during a recession, you’ll probably do pretty well in the long run. But investors should know that it’s almost always a losing battle to try to time the market. No crystal ball can tell you when the market will hit its lowest point. In other words, you won’t be investing at the best possible time.

You don’t have to, though. Even if you had invested in an S&P 500 index fund at the worst possible time, the market’s peak before the financial crisis in 2007, you would have made 8.4% per year on your money over the past 13 years. If you had bought at the peak before the recession of 1990-1991, you would have made 9.8% per year on your money.

Think about what that means. If you had put $10,000 into a standard S&P 500 index fund at the worst possible time, during the recession of 1990-1991, your money would be worth more than $150,000 today, assuming you re-invested all the dividends along the way.

What to Invest in During a Recession?

Should I Invest During a Recession

In the last section, we talked about index funds, which can be a good way to invest whether or not there is a recession. When you buy index funds, especially S&P 500 index funds, you are making a long-term bet on the success of U.S. businesses. That has been a pretty safe bet over long periods of time.

But we know that a lot of people who read this would rather invest in individual stocks. The best way to invest is to find good businesses and keep them as long as they are good businesses. This is especially important when the economy is in a recession.

As an example, companies in affected industries that had stronger balance sheets before the COVID-19 pandemic and recession had an advantage over those that didn’t. Companies with the financial flexibility to survive a long disruption started to look like great long-term investments, while companies with good businesses but low liquidity were among the hardest-hit stocks, and some didn’t make it.

How you invest can be just as important as what you invest in during a recession. Stocks tend to be very unstable during recessions, as anyone who traded during the 2008-2009 financial crisis can tell you.

Instead of trying to time the market, invest in small amounts over time. This strategy is called “dollar-cost averaging,” and it means to invest the same amount of money at set times instead of buying everything at once.

So, if prices keep going down, you’ll be able to take advantage and buy more. And if the prices start to go up, you’ll end up buying more shares when the prices are low and fewer shares when the prices of your favorite stocks go up.

In short, a recession can be a great time to buy shares of good companies at good prices.

What Not to Invest in During a Recession?

Should I Invest During a Recession

During a recession, it’s best not to gamble, especially on stocks that have been hit the hardest. During recessions, weaker companies often go bankrupt, and stocks that have dropped by 80%, 90%, or even more might look like deals, but they are usually cheap for a reason. Just remember that a broken business that sells for a great price is still broken.

Still, the most important thing isn’t so much what not to invest in as what not to do. Specifically:

  1. Don’t try to guess when the bottom will be. As was already said, it’s a losing battle to try to time the market. Wouldn’t it have been great if you had invested as much as you could on March 9, 2009, when the S&P 500 was at its lowest point during the financial crisis? Yes, but it would also be great if you knew the lottery numbers for tomorrow in advance. No one knows when the market will hit bottom, so invest in stocks or funds that you plan to keep for a long time, even if the market keeps falling in the short term.
  2. Don’t try to trade for one day. Stock trades with no fees and trading apps that are easy to use make it easier than ever to start trading stocks for fun. It’s fine to play around with a small amount of money that you don’t mind losing. But investing for the long term is a much more sure way to get rich in the stock market. Day trading as a way to make money is usually not a good idea.
  3. Don’t sell your stocks just because they went down. Last but not least, one thing that you should never do during a recession is sell your stocks in a panic when they fall. When the stock market is in free fall, you might be tempted to sell “before things get any worse.” Don’t let your feelings win. The goal of investing is to buy low and sell high, but panic selling does the exact opposite.

Investing in a Recession

In a summary, it’s important to stay the course during a recession. During a recession, it’s a little more important to focus on high-quality companies, but you should still invest the same way you would at any other time. Buy good companies or funds and keep them as long as they keep being good.

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