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Updated on Friday, April 24, 2020
You should invest whether the market is up, down or zigzagging — even during the coronavirus pandemic — as consistently investing is key to building a solid financial future. However, to reap the rewards of investing during a recession, it’s important to remember a few important guidelines.
- Benefits of investing when the market is down
- When to avoid investing when the market is down
- How to invest when the market is down
Benefits of investing during a recession
The biggest benefit of investing when the market is down is that you might eventually make more money off of your investments when the market recovers. If you buy stocks when they hit a rock bottom price and then sell them when they are back on the up-and-up, you’ll get more bang for your buck. It’s like buying the latest tech gadget at a deep discount, and then reselling it at a much higher price when it’s in high demand during the holiday season.
“Investors should absolutely invest during a market downturn,” said David Shotwell, a CFP. “This may be a once-in-a-lifetime opportunity for some investors to buy stocks at low prices.”
Shotwell advises investors to keep their contributions flowing into their account, and try not to be shaken by the market volatility, noting that if your asset allocation made sense before the downturn, it should still be logical during it. You should rebalance your portfolio if needed, he says, but try not to change your risk levels.
When to avoid investing when the market is down
While investing when the market is down can be a smart money move to make, it should not necessarily be your first financial priority. Before investing, first make sure you have a well-stashed emergency fund, with liquid savings on hand. This should be your top priority when deciding where to put money during a recession.
If the stock market is dipping, that might mean the economy is taking a beating, too, underscoring the importance of having enough money in a liquid savings account to cover three to nine months’ worth of expenses in case you lose your job or get hit with a hefty, unexpected bill. You should not be dumping your money into a falling market if you lack such savings.
“It’s critical to have an emergency fund set up so that you don’t need to raid your 401(k) during a down market,” said Shotwell. “Taking funds out during upheavals undoes all the good of adding funds during these times, so have an adequate bank savings to protect against that.”
Investing during market lows can feel painful, especially if you have your eyes glued to your portfolio and are nearing retirement. However, experts still recommend that even those nearing their golden years should sit tight, but they might want to consult a financial planner to determine the best course of action for added reassurance.
“The only investors who should be taking any action would be those who are at or near retirement,” said Michael C. Whitman, a CFP. “The hope would be they have already sought out guidance from a financial planner and have properly allocated their account for their current risk tolerance. If they are properly allocated, they should also continue their contributions as normal.”
How to invest during a recession
If you’re in the financial position to invest when the market is down, you’ll want to have a clear plan in place for what to invest in during a recession and how. It’s typically not advised to go bargain-hunting just for the sake of a good sale, and that’s also the case for investing in stocks. Instead, remember that you are investing for the long haul.
Here are some tactics and lessons to keep in mind for investing during a recession:
1. Try dollar-cost averaging
An effective way of investing for the long term when the market is down is through dollar-cost averaging. Dollar-cost averaging is a tactic in which you invest your money evenly and routinely over a longer period of time, at regular intervals. For example, if you have $10,000 to invest, you might invest $1,000 monthly, regardless of what the market is doing
Whitman says that dollar-cost averaging is the best investing method to use when the market is down. He recommends making systematic payments and not trying to time the market.
“Dollar-cost averaging works to your advantage when the market is down because you are able to buy more shares for your money,” said Whitman. “When the market is up, you will be buying less shares for the money you put in. If you keep your savings and investment strategy consistent, you can take advantage of the market volatility and average how much that investment actually costs you. This is also a good strategy to protect yourself if the market goes down further.”
2. Don’t try to time the market
While “buy low, sell high” is a popular investing mantra, you should not try to time the market, which is when an investor attempts to predict when the market is going up or down and enters the market or pulls out accordingly. This is difficult — if not impossible — to do. Trying to anticipate when the market will bottom out and when it will peak is a guessing game, and it makes investing more of a gamble than a sound strategy.
Instead, there are safer and smarter ways you should invest, such as taking a systematic and balanced approach to investing, like with dollar-cost averaging mentioned above. Buy-and-hold doesn’t necessarily mean doing nothing either, as you can check in with your portfolio regularly and readjust your asset allocation accordingly.
3. Respect your risk tolerance
Regardless of which way the market is moving, it’s important to understand your risk tolerance when investing. This becomes even more important when the market is plummeting.
Your risk tolerance is essentially your ability to withstand market volatility, and it is based on factors like your age and investing time frame. Older investors who are closer to retirement age typically can’t handle as much risk as younger investors who have a longer time horizon to ride out the highs and lows.
With your 401(k) plan, for example, many plans offer target date retirement funds, which are designed to be appropriate for how long you have until you retire, says Shotwell, adding that those funds are a good default choice.
“The same principles hold true during a down market as an up market,” said Shotwell. “You should have an intentionally built portfolio geared toward your age and how much market volatility you can stand.”
Remember, navigating the market — especially during a downturn — can be an intimidating experience. Consider consulting with a financial advisor to help cut through the chaos of the stock market during times of crisis.