Investing During a Recession

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Buy low, sell high. It’s the most basic rule of paper asset investing, yet many investors do the opposite. Investors tend to buy high, hoping the high price will get higher, and then sell low, fearing the low price will fall lower. But as an investor, you should understand that you don’t lose any money until you sell. During a recession, investing can be especially intimidating. It may seem like everyone is losing money, but only those who sell lock in their losses. Should you invest in paper assets during a recession? Absolutely! When you’re investing for the long term, it’s more important to put money into investments than to take money out. Below are four tips for investing during a recession.

 

Tip #1: Continue Dollar-Cost Averaging

The Wealth Academy recommends dollar-cost averaging for paper assets. This means regularly contributing a fixed dollar amount to your investments, regardless of share price or market performance. Dollar-cost averaging minimizes risk because it allows you to buy more shares when the price is low, and fewer shares when the price is high. This helps to reduce the impact of volatility, which means you’re less likely to mistakenly invest a poorly-timed lump sum.

If you usually implement a dollar-cost averaging strategy, continue doing so throughout a recession. Often, the best market days happen within mere weeks of the worst market days. If you stop contributing during a recession, you risk missing out on the best market days.

 

Tip #2: Invest in Companies with Strong Financial Reports

Companies with strong balance sheets and steady business models are positioned to weather a recession and can thrive in the following years. However, companies with high debt loads struggle more during a recession when sales fall, and are more at risk for defaulting and possibly declaring bankruptcy. Consider investing in companies that have low debt, good cash flow, and generate a profit. These companies are more likely to produce a higher return when the recession period ends.

 

Tip #3: Don’t Try to Time the Market

Time, not timing, yields the greatest returns. Long term investors have historically done well by staying invested during a recession. Attempting to time the market is highly risky, not to mention stressful, and because market highs come shortly after market lows, you risk missing out on the best market days if you pull out of your investments early or wait too long to invest. Even if you had invested on the worst possible days in 2007 before the recession, you still would have seen an 8.4% return over the following 13 years.

Over a 20-year period, there are approximately 5,000 days the stock market is open. Of those 5,000, only 10 days are responsible for half of an investment’s increase. If you try to time the market, chances are you will miss these 10 best days and cut your return in half. And even if you pick the very worst days to invest every year, you can still see a return in the long run if you stay invested.

 

Tip #4: Don’t Sell

Again, the goal is to buy low, sell high. Don’t panic-sell low and take a loss unnecessarily. If you’re investing for the long term, you shouldn’t need to withdraw funds from your investments, which means you don’t need to worry about short term ups and downs. Your paper asset investments should not be your emergency fund. If you have to withdraw funds because you have an emergency need for cash, you’ll most likely end up taking a loss on your investments. Emergencies don’t often time themselves to your advantage.

Additionally, selling your paper asset investments means you’re more likely to miss the best market days. According to J.P. Morgan, an investor with $10,000 in the S&P 500 Index who stayed fully invested between Jan. 4, 1999 and Dec. 31, 2018 would have gained about $30,000. An investor who got out of the market and therefore missed 10 of the best days in the market each year would have under $15,000. A very skittish investor who missed 30 of the best days would have less than what they started with—$6,213 to be exact.

 

Conclusion

The important thing is to keep a long term view of investments. Stock prices often fall during a recession, which makes it a good time to buy. There is greater potential for higher returns during a recession, so you increase your future return by taking advantage of the lower stock prices.

As always, make sure your investment decisions line up with your goals, timeline, and risk tolerance. Some investors may be near the end of their long-term investment plan when a recession occurs, and may need to implement a different strategy, while others may be perfectly positioned to take advantage of recession discounts and returns for 10-20 years. As you make your investment decisions, be sure to consult your professional advisory team.

Sources: J.P. Morgan, The Balance, Investopedia 1 2, The Motley Fool 1 2, Bankrate

 

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