A potential recession can stir up worry like a storm on the horizon. How will your investments fare? Can you protect your hard-earned returns? We’re here to help you find some peace of mind.
Figuring out what to invest in during a recession can be a struggle. The good news is that by using a combination of discipline and history, you can avoid common pitfalls and identify opportunities to thrive when choppy economic waters roll in.
If you’re ready to make moves to protect your assets at the first whiff of a recession, know this: It is a very human stress response. However, that same “very human” response can lead to unwise decisions that put your assets at greater risk.
To help you avoid more risk as recessionary talk fills the airwaves, three investing moves to avoid include:
A recession isn’t the time to bet on high-risk, high-reward companies focused on growth. A tech startup that isn’t yet profitable or a firm that invests heavily in research and development may fit the bill as speculative investments to avoid.
Also, consider limiting your exposure to cyclical companies whose performance correlates to economic cycles. These businesses, which often rely on consumer discretionary spending, perform well during economic prosperity but poorly during downturns.
Some examples of cyclical industries include:
Check your feelings if you feel the urge to stop contributing to your IRA or 401(k) during a recession. You could miss out on the “buy low” part of the “buy low, sell high” adage.
Pressing pause means you’ll likely not only miss out on the chance to increase your holdings while prices are low. It could also mean you’ll miss out on the stock market’s best days, which are difficult to predict.
Bob French, a retirement expert and Chartered Financial Analyst (CFA), studied the impact of mistiming market upswings between 1926 and 2016. He found that missing the single best month in the market during that time would have cut an investor’s return by nearly 30%.
Missing the 10 best months in the market would have left you with approximately half as much money as someone who kept their money invested the whole time.
Perhaps most importantly, avoid the temptation to cut your losses and cash out. Don Grant, an investment advisor and certified financial planner (CFP) based in Wichita, Kan., said new investors may panic and sell their investments instead of trusting that the stock market has always recovered from corrections and bear markets.
For example: The S&P 500 rose 69% within a year of hitting its lowest point during the Great Recession (2007 to 2009) and 311% within 10 years. So taking a break from the stock market amid the Great Recession would have cost you some serious gains.
Grant says that it’s common for investors to want to cash out during market dips and not get back in until they feel comfortable. However, he notes that your “comfort point” may not arrive until the bulk of the market recovery has already happened. In that case, you’ll have sold low and have no choice but to buy back in high.
Despite the list of “don’ts” above, investing during a recession also has a tidy to-do list. At its core, this to-do list is about revisiting investing basics: staying disciplined and the details defining more reliable companies in every economy.
Before the talk of a recession started to swell, you likely had an investing strategy. A recession doesn’t chuck your strategy out the window.
Recessions are times when you can dig in and let your strategy guide your decisions. Not only will a disciplined approach help you avoid rash moves in the short term. It’ll keep you on track for your long-term goals. So a recession is an ideal time to:
When considering what to invest in during a recession, remember that some industries and sectors are considered “recession-proof.” Therefore, when investing during a recession, these sectors should be top of mind.
Non-cyclical industries are often called “recession-proof” because they produce goods and services that typically stay in high demand regardless of the economy’s performance.
State Street Global Advisors studied the seven most recent recessions (not including the brief recession of 2020). The firm found that consumer staples, health care and utilities performed best out of 10 broad industry sectors.
You can add these “recession investments” to your portfolio using individual stocks, mutual funds or exchange-traded funds (ETFs).
Chefs know they can make the best food when using high-quality ingredients. Likewise, you can make your portfolio better by investing in high-quality companies. So during a recession, get back to the basics that make companies great. Look for:
You likely have enough stress in life, so why let a recession add to them? By combining discipline and sound investing principles, you can keep your portfolio on track for the future without letting today’s economic downturn rob you of market returns.
The National Bureau of Economic Research (NBER) is the organization that officially declares recessions. The group classified the brief downturn of 2020 as a recession because the drop in economic activity was so severe and widespread.
There have been 12 recessions since 1948, lasting an average of 10 months. However, there are significant outliers. For example, while the Great Recession following the 2008 financial crisis endured for about 18 months, the COVID-19 pandemic recession of 2020 lasted approximately two months.
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