Recessions are inevitable phases of the economic cycle that occur when the gross domestic product (GDP) declines for at least two consecutive quarters.
Recessions are usually accompanied by other negative effects, such as rising unemployment, lower consumer spending, reduced business activity, and increased government debt.
Recessions can have a significant impact on the stock market, as investors lose confidence and demand for stocks decreases. This leads to lower stock prices and lower returns for investors.
However, recessions can also create opportunities for savvy investors who are willing to take some risks and have a long-term perspective.
Investing in the stock market during a recession can be a way to buy stocks at discounted prices and sell them at higher prices later, as well as generate passive income from dividends.
But investing in the stock market during a recession is not easy or straightforward. It requires careful planning, research, and discipline. It also requires a clear understanding of the risks and challenges involved.
In this article, we will share some tips on how to invest in the stock market during a recession, based on the advice of some experts and sources.
We will cover the following topics:
- Why you should have enough emergency savings before investing
- Why you should take a long-term approach to investing
- Why you should avoid obsessing over your portfolio
- Why you should diversify your portfolio
- Why you should invest incrementally
By following these tips, you can increase your chances of surviving and thriving during a recession and achieving your financial goals.
Why You Should Have Enough Emergency Savings Before Investing
One of the most important prerequisites for investing in the stock market during a recession is having enough emergency savings.
Emergency savings are funds that you set aside in a safe and liquid account, such as a high-yield savings account, a money market account, or a short-term CD.
These funds are meant to cover your essential expenses for at least three to six months in case of an unexpected financial emergency, such as losing your job, getting sick, or having to repair your car or home.
Having enough emergency savings is crucial for several reasons. First, it can help you avoid having to sell your investments at a loss if you need cash during a recession.
Selling your investments at a loss can hurt your long-term returns and make it harder for you to recover from the recession.
Second, it can give you peace of mind and confidence to invest in the stock market during a recession. You will be able to withstand the volatility and uncertainty of the market without worrying about your short-term cash flow.
Third, it can help you take advantage of some opportunities that may arise during a recession. You may be able to buy some stocks at bargain prices or increase your contributions to your retirement accounts if you have extra cash available.
Before you invest any money in the stock market during a recession, you should make sure that you have enough emergency savings to cover your essential expenses for at least three to six months.
The exact amount of emergency savings that you need may vary depending on your income, expenses, lifestyle, and family situation. A general rule of thumb is to multiply your monthly expenses by three or six and save that amount in an emergency fund.
You should keep your emergency savings in a safe and liquid account that offers easy access and low fees. You should avoid investing your emergency savings in the stock market or any other risky asset that can lose value or be hard to access when you need it.
Why You Should Take a Long-Term Approach to Investing
Another key tip for investing in the stock market during a recession is to take a long-term approach to investing. This means that you should only invest money that you don’t need for at least seven years or more.
This will give you enough time to ride out the ups and downs of the market and benefit from its long-term growth potential.
Taking a long-term approach also means that you should have a clear investment plan and stick to it. You should know your goals, risk tolerance, time horizon, and asset allocation.
Your goals are what you want to achieve with your investments, such as saving for retirement, buying a house, or paying for college.
Your risk tolerance is how much risk you are willing and able to take with your investments, based on your personality, financial situation, and knowledge.
Your time horizon is how long you plan to keep your investments before selling them or using them for your goals. Your asset allocation is how you divide your portfolio among different asset classes, such as stocks, bonds, cash, or alternative investments.
You should also review your portfolio periodically, such as once a quarter or once a year, and rebalance it if necessary. Rebalancing is the process of adjusting your portfolio to maintain your desired asset allocation and risk level.
For example, if your portfolio has become too skewed toward stocks due to market movements, you may want to sell some stocks and buy some bonds to bring them back to your target allocation.
You should avoid making impulsive or emotional decisions based on short-term market movements. You should not sell your stocks when they are down or chase after hot sectors when they are up.
These actions can result in locking in losses or buying high and selling low, which can hurt your long-term returns. Instead, you should stick to your investment plan and focus on your long-term goals.
Why You Should Avoid Obsessing Over Your Portfolio
One of the biggest mistakes that investors make during recessions is obsessing over their portfolios. They check their portfolio value every day or even every hour and see how much they have gained or lost.
They get anxious and fearful when they see their portfolio value drop and greedy and euphoric when they see it rise.
Obsessing your portfolio can lead to stress and panic. You may be tempted to sell your stocks when they are down or chase after hot sectors when they are up.
These actions can result in locking in losses or buying high and selling low, which can hurt your long-term returns.
Instead of obsessing over your portfolio, you should focus on other aspects of your life, such as your health, family, friends, hobbies, and work.
You should also educate yourself on the fundamentals of investing and the economy and keep yourself updated on the news and events that affect the market.
This will help you maintain a rational and objective perspective on your investments and avoid falling prey to fear or greed.
Why You Should Diversify Your Portfolio
Another important tip for investing in the stock market during a recession is to diversify your portfolio. This means that you should have a mix of different asset classes and industries that can perform well under different economic conditions.
Diversifying your portfolio can help you reduce your risk and smooth out your returns during a recession. You can benefit from some sectors that tend to do well during recessions, such as consumer staples, health care, utilities, or technology.
These sectors provide essential goods and services that people need regardless of the state of the economy. They may also benefit from increased demand or innovation during recessions.
You can also diversify your portfolio by investing in some value stocks that are undervalued by the market and offer attractive dividends. Value stocks are stocks that trade at a low price relative to their earnings, book value, or other metrics.
They may be overlooked or ignored by the market due to various reasons, such as poor performance, bad reputation, or unfavorable industry trends.
However, they may have strong fundamentals, such as low debt, good cash flow, and strong balance sheets, that can help them survive and thrive during recessions.
They may also pay dividends that can provide you with a steady source of income and cushion your portfolio from market declines.
You should avoid putting all your eggs in one basket and investing in only one asset class or industry. This can expose you to more risk and volatility during a recession.
For example, if you invest only in cyclical sectors, such as energy, materials, or consumer discretionary, you may suffer more losses during a recession as these sectors depend on economic growth and consumer spending.
Similarly, if you invest only in growth stocks that trade at high valuations based on future expectations, you may face more downside risk during a recession as these expectations may not materialize.
You should aim to have a balanced and diversified portfolio that reflects your goals, risk tolerance, time horizon, and market conditions. You can use various tools and resources to help you determine your optimal asset allocation and diversification strategy.
Why You Should Invest Incrementally
One of the most difficult aspects of investing in the stock market during a recession is timing the market. You may want to buy stocks at the lowest point and sell them at the highest point, but this is almost impossible to do consistently.
You may end up buying too early or too late or selling too early or too late, and miss out on some opportunities or incur some losses.
A better strategy is to invest incrementally.
This means that you invest equal amounts of money at regular intervals, such as monthly or quarterly. This is known as dollar-cost averaging, and it can help you lower your average cost per share and take advantage of market fluctuations.
For example, suppose you want to invest $12,000 in the stock market during a recession.
Instead of investing the whole amount at once, you invest $1,000 every month for 12 months. If the stock price varies from $10 to $20 during this period, your average cost per share will be $14.58, lower than the average price of $15.
This way, you can buy more shares when the price is low and fewer shares when the price is high.
Investing incrementally can also help you avoid emotional investing. You don’t have to worry about timing the market or making big decisions.
You just follow your plan and invest regularly regardless of the market conditions. This can help you stay disciplined and focused on your long-term goals.
Conclusion
Investing in the stock market during a recession can be a risky but potentially rewarding strategy if you do it right.
You should have enough emergency savings before investing, take a long-term approach to investing, avoid obsessing over your portfolio, diversify your portfolio, and invest incrementally.
By following these tips, you can increase your chances of surviving and thriving during a recession and achieving your financial goals. However, you should also remember that investing in the stock market during a recession is not for everyone.
It requires patience, discipline, and courage. You should only invest money that you can afford to lose and that you don’t need for at least seven years.
You should also consult a financial planner or do more research before making any investment decisions.
We hope you found this article helpful and informative. If you have any questions or comments, please feel free to share them below. Thank you for reading and happy investing!
Frequently Asked Questions
Here are some possible FAQs related to investing in the stock market during a recession:
What is a recession and how does it affect the stock market?
A recession is a period of economic decline that typically lasts for at least two consecutive quarters. It is characterized by falling GDP, rising unemployment, lower consumer spending, and reduced business activity.
A recession can have a negative impact on the stock market, as investors lose confidence and demand for stocks decreases. This leads to lower stock prices and lower returns for investors.
How can I tell if we are in a recession or heading for one?
The official declaration of a recession is made by the National Bureau of Economic Research (NBER), an independent nonprofit that monitors the U.S. economy.
The NBER defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
However, the NBER usually waits until sufficient data is available before making a declaration, so it may not be timely or accurate.
One common indicator of a recession is two consecutive quarters of negative GDP growth, but this is not a definitive or exclusive criterion.
Other indicators of a recession include rising unemployment, falling consumer confidence, declining industrial production, and an inverted yield curve.
How should I invest during a recession?
There is no one-size-fits-all answer to how to invest during a recession, as it depends on your goals, risk tolerance, time horizon, and available resources.
However, some general tips for investing during a recession are:
- Have enough emergency savings before investing
- Take a long-term approach to investing
- Avoid obsessing over your portfolio
- Diversify your portfolio
- Invest incrementally
What are some of the best sectors or stocks to invest in during a recession?
Some of the best sectors or stocks to invest in during a recession are those that provide essential goods and services that people need regardless of the state of the economy, such as consumer staples, health care, utilities, or technology.
These sectors may also benefit from increased demand or innovation during recessions. Some examples of stocks in these sectors are:
- Consumer staples: Walmart (WMT), Costco (COST), Procter & Gamble (PG), Coca-Cola (KO)
- Health care: Johnson & Johnson (JNJ), Pfizer (PFE), UnitedHealth Group (UNH), Abbott Laboratories (ABT)
- Utilities: NextEra Energy (NEE), Duke Energy (DUK), Southern Company (SO), American Electric Power (AEP)
- Technology: Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG)
Another option is to invest in value stocks that are undervalued by the market and offer attractive dividends. Value stocks are stocks that trade at a low price relative to their earnings, book value, or other metrics.
They may be overlooked or ignored by the market due to various reasons, such as poor performance, bad reputation, or unfavorable industry trends.
However, they may have strong fundamentals, such as low debt, good cash flow, and strong balance sheets, that can help them survive and thrive during recessions.
They may also pay dividends that can provide you with a steady source of income and cushion your portfolio from market declines.
Some examples of value stocks are:
- AT&T (T)
- Chevron (CVX)
- IBM (IBM)
- Walgreens Boots Alliance (WBA)
What are some of the worst sectors or stocks to invest in during a recession?
Some of the worst sectors or stocks to invest in during a recession are those that are highly leveraged, cyclical, or speculative, as these companies pose the biggest risk of doing poorly during tough economic times.
These sectors include energy, materials, consumer discretionary, and financials. These sectors depend on economic growth and consumer spending, which tend to decline during recessions.
They may also face lower demand, higher costs, lower profits, or higher defaults during recessions.
Some examples of stocks in these sectors are:
- Energy: Exxon Mobil (XOM), Chevron (CVX), BP (BP), Schlumberger (SLB)
- Materials: Dow (DOW), DuPont (DD), Freeport-McMoRan (FCX), Alcoa (AA)
- Consumer discretionary: Starbucks (SBUX), Nike (NKE), Marriott (MAR), Ford (F)
- Financials: Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C)
Another option is to avoid investing in growth stocks that trade at high valuations based on future expectations, as these expectations may not materialize during recessions.
Growth stocks are stocks that have high earnings growth potential and often reinvest their profits into expanding their business. They may have low or no dividends and high price-to-earnings ratios.
They may face more downside risk during recessions as their growth prospects may dim or their valuations may contract.
Some examples of growth stocks are:
- Tesla (TSLA)
- Netflix (NFLX)
- Shopify (SHOP)
- Zoom (ZM)
How can I protect my portfolio from a recession?
There is no foolproof way to protect your portfolio from a recession, as recessions are unpredictable and inevitable. However, there are some steps you can take to reduce your risk and mitigate your losses during a recession.
These include:
- Having enough emergency savings before investing
- Taking a long-term approach to investing
- Avoiding obsessing over your portfolio
- Diversifying your portfolio
- Investing incrementally
- Rebalancing your portfolio periodically
- Having a stop-loss strategy
- Hedging your portfolio with options or inverse ETFs
A stop-loss strategy is a way of limiting your losses by setting a price at which you will sell your stocks if they fall below a certain level. This can help you preserve your capital and avoid holding on to losing stocks for too long.
However, a stop-loss strategy can also backfire if the market rebounds quickly and you miss out on the recovery.
Hedging your portfolio with options or inverse ETFs is a way of offsetting your losses by buying securities that move in the opposite direction of your stocks.
For example, you can buy put options that give you the right to sell your stocks at a predetermined price if they fall below that price. Or you can buy inverse ETFs that rise in value when the market falls.
However, hedging your portfolio can also be costly and risky, as options and inverse ETFs have fees, expiration dates, and leverage effects that can magnify your losses.
How can I take advantage of a recession?
While recessions can be scary and stressful for investors, they can also offer some opportunities for those who are prepared and willing to take some risks.
Some of the ways you can take advantage of a recession are:
- Buying stocks at bargain prices
- Increasing your contributions to your retirement accounts
- Refinancing your mortgage or debt
- Starting or expanding your business
Buying stocks at bargain prices is one of the most obvious ways to take advantage of a recession. You can use the market downturn as an opportunity to buy high-quality stocks that are undervalued by the market and offer attractive dividends.
You can also use dollar-cost averaging to lower your average cost per share and benefit from market fluctuations.
Increasing your contributions to your retirement accounts is another way to take advantage of a recession. You can use the lower stock prices to buy more shares for your 401(k), IRA, or other retirement accounts.
You can also benefit from the tax advantages and compounding effects of these accounts. Refinancing your mortgage or debt is another way to take advantage of a recession.
You can use the lower interest rates that usually accompany recessions to refinance your mortgage or debt and lower your monthly payments and interest costs. This can help you free up some cash flow and save money in the long run.
Starting or expanding your business is another way to take advantage of a recession. You can use the lower competition, lower costs, and higher demand for certain products or services that may arise during recessions to start or grow your own business.
You may also be able to find some financing options or government incentives that can help you with your business venture.
Where can I find more information or help on investing during a recession?
If you want to learn more about investing during a recession or get some professional help with your investment decisions, there are some resources and services that you can use.
These include:
- Books and articles on investing and the economy
- Online courses and podcasts on investing and the economy
- Financial planners and advisors
- Robo-advisors and online brokers
Books and articles on investing and the economy are some of the most accessible and affordable sources of information and education on investing during a recession.
You can find many books and articles on various topics related to investing and the economy, such as asset allocation, diversification, value investing, dividend investing, behavioral finance, economic indicators, market cycles, etc.
Some examples of books and articles on investing during a recession are:
- The Intelligent Investor by Benjamin Graham
- The Little Book of Common Sense Investing by John C. Bogle
- The Four Pillars of Investing by William J. Bernstein
- The Black Swan by Nassim Nicholas Taleb
- How To Invest During A Recession – Forbes Advisor
Online courses and podcasts on investing and the economy are other sources of information and education on investing during a recession.
You can find many online courses and podcasts on various platforms that cover different aspects of investing and the economy, such as stock market basics, financial analysis, portfolio management, macroeconomics, microeconomics, monetary policy, fiscal policy, etc.
Some examples of online courses and podcasts on investing and the economy are:
- Investing 101: Understanding the Stock Market by Skillshare
- The Stock Market for Beginners by Udemy
- Planet Money by NPR
- The Indicator by NPR
Financial planners and advisors are professionals who can help you with your investment decisions and provide you with personalized advice and guidance.
They can help you assess your financial situation, goals, risk tolerance, and time horizon. They can also help you create and implement an investment plan, monitor and adjust your portfolio, and provide ongoing support and education.
You can find financial planners and advisors through various channels, such as referrals, online directories, or platforms.
Some examples of financial planners and advisors are:
- Certified Financial Planner (CFP)
- Chartered Financial Analyst (CFA)
- NAPFA-Registered Financial Advisor
- XY Planning Network
Robo-advisors and online brokers are online platforms that can help you with your investment decisions and provide you with automated or semi-automated services.
They can help you create and manage your portfolio, execute your trades, rebalance your portfolio, optimize your taxes, and provide some advice and education. You can find robo-advisors and online brokers through various websites or apps.
Some examples of robo-advisors and online brokers are:
- Betterment
- Wealthfront
- Vanguard
- Fidelity
Conclusion
Investing in the stock market during a recession can be a risky but potentially rewarding strategy if you do it right.
You should have enough emergency savings before investing, take a long-term approach to investing, avoid obsessing over your portfolio, diversify your portfolio, and invest incrementally.
You should also use various resources and services to help you with your investment decisions and provide you with more information and education.
We hope you found this article helpful and informative. If you have any questions or comments, please feel free to share them below. Thank you for reading and happy investing!
