Welcome to our Smart Money Club recession investing series. To answer the question, should you invest during a recession? Yes, you should invest during a recession. When the economy turns downward, it is normal to ask how to best invest in these times. But, certain investments, such as stocks, can be riskier in a downturn. To take your investing to the Power of X, you want to choose the right investments in these trying times. You can, in fact, see significant returns during a recession if you follow some timeless strategies.
Making Money with Recession Investing
When the economy heads downward, it is tempting to try to time the market and buy when the price reaches the bottom; however, many investors are shocked to hear that the same principles used in a bull market should be utilized during a recession too.
Don’t Stop Investing
Whether you are making a regular contribution to your IRA or 401(k) or using a live or online Robo investor, you want to continue your saving and investing during the recession. The idea behind lifelong investing is that you will buy shares both when the prices are high and when the prices are down during the recession, but your average will be in the middle, and over the long term, you are taking advantage of the time value of money.
In general, the stock market goes up in value. Over the past 30 years (1991 to 2020), the S&P500 has returned an average of 10.72%. These are the kinds of consistent returns that we want to see for successful long-term investing. This is with all of the ups and downs that have been seen over those 30 years.
Rebalance Your Investments
When you see prices falling, you can use it as an opportunity to rebalance your holdings to fit your investment goals. You may have a defined portfolio allocation of 2/3rds stocks and 1/3rd bonds. When we enter a recession, the value of your stocks will have likely fallen. You can rebalance your portfolio in one of two ways. The quick way, is to sell some bonds and purchase stocks with the proceeds. You can also invest your weekly/monthly savings into only stocks until the balance is achieved, generally a slower method. It will depend on how far from the defined allocation you are. The farther you are, the more bonds you would sell to buy stocks.
Maintain a Long-Term View
When we buy stocks or stock funds, we will generally have a long-term investment horizon (5 to 10 years.) With this way of thinking, you don’t need to worry about short-term market movements. Your stress level will be reduced if you just keep doing as you have done in the past.
Maintain Your Investing Strategy
Though stocks are down, you don’t have to change how you invest. Timing is nearly impossible; trying to sell right before a recession hits can cause you to miss out on gains or be too late. This advice is the same for both short and long-term investors and retirees who rely on their savings.
For long-term investors, keep adding funds to your tax-advantaged accounts (401(k) or IRA); don’t stop. You should not be chasing performance. Stocks may be falling and bonds rising, but don’t allocate more to bonds; use this as a chance to buy cheaper priced stocks.
Short-term investors and retirees may be worried during a bull market, but you should not sell at a loss. If you need income consistently, then before a recession, you should allocate some of your portfolios to cash and bonds. Yes, before the recession hits in the first place, you can see it coming most of the time. That way, you have these recession-resistant assets and cash to use until stocks recover.
Understand Your Risk Tolerance
When you want to make use of the market correction during a recession, you should try not to buy more stocks than when you would in better times. You want to be balancing your portfolio to match your risk tolerance. Once that balance is reached, you should be investing as usual and ignore what the market is doing.
In our next Smart Money Club Recession Investing lesson, we will continue discussing how you can prepare for a coming recession and how best to invest. To take your investing to the Power of X, you should understand how certain investments perform and how best to make them a part of your investing strategy.
