If falling stock prices and rising unemployment rates have got you too scared to invest, then take a deep breath! Despite your fears, a recession is actually the perfect time to be buying up all kinds of assets.
Here’s how you should invest your money during a recession and why it will benefit you in the future.
What Is A Recession?
A recession is generally considered to be a significant decline in economic activity, typically recognized by two or more consecutive quarters of negative GDP (gross domestic product) growth. Officially in the U.S., a recession can only be declared by the National Bureau of Economic Research (NBER).
Recessions are a common part of a normal economic cycle. Businesses can’t grow forever, and inevitably there will be temporary periods when stock prices decline, consumption reduces, and unemployment goes up.
Since the Great Depression back in the 1920s, there have been a total of 14 recessions in the U.S. In recent times, the Great Recession of 2008 is a period that most adults will associate with. This was a recession caused mostly due to the “housing bubble” where home prices collapsed after rising to unsustainable highs.
Invest During A Recession – Don’t Sell Your Assets
As investment guru Warren Buffett often says, “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”
If there’s one thing you could do to benefit your finances during a recession, it’s this: Do nothing!
One of the biggest mistakes people make during a recession is to pull their money out of stocks and put them into more stable assets. That’s definitely not something you want to do because you’re effectively “buying low and selling high” – the complete opposite of what you want to accomplish as an investor.
Generally speaking, once your assets lose their value, the best strategy is just to ride out the storm. Once the recession ends (and it will eventually), you’ll more than likely see your assets regain their value.
Why A Recession Is An Investment Opportunity
Though it can feel counter-intuitive, a recession is actually the perfect time to buy up assets; especially the stocks of reputable companies.
Why? Because the reason these companies’ share prices are down is thanks to a reaction from the market rather than some inherent problem with the health of the business. You could almost think of it like the market decided to put stock prices on sale.
That’s why if you’re already regularly contributing to a retirement plan such as a 401(k) or IRA, don’t stop or reduce them. By continuing to put money in the market, you’ll buy up a higher quantity of assets due to the lower prices. In fact, if you have the means to, increase your contribution levels as much as possible to maximize your returns!
Continuing to purchase assets through a market dip is a well-known strategy called dollar-cost averaging. Effectively, by buying stocks while they’re low, as the prices start to increase, you’ll still be making money on them because you paid a lower average price for them.
What Assets Should You Invest In?
So now that you realize that recessions can actually be an opportunity to invest, what kinds of assets should we look at buying?
Stocks / Dividend Stocks
As we said, even good companies can see their share price fall during a recession for reasons that have nothing to do with the business itself. When that happens, it can be a huge opportunity for you to make money in stocks!
Looking to recommendations from top-rated financial sites like Nerd Wallet and The Motley Fool cab be a good place to start. Of course, be sure to check the metrics of each potential stock to ensure for yourself that it’s worth the purchase.
In particular, take advantage of dividend-paying stocks. These are companies that pay out a percentage of their earnings to shareholders every quarter. That can be especially rewarding during a recession because not only are you likely buying the stock at a reduced price, but you’ll also receive a nice payment each quarter. You could make quite the passive income investing in dividends. Check out companies from the Dividend Aristocrats.
Mutual Funds And ETFs
If buying individual stocks isn’t your thing, then why not buy up bundles of them all at once!
Mutual funds and ETFs (exchange-traded funds) are collections of assets that contain various combinations of stocks, bonds, etc. If it’s a fund that is heavy with equities, then its share price will also be depressed and that will create a good buying opportunity.
You can purchase stocks, mutual funds, and ETFs through any of the following:
- Full-service brokers such as Vanguard and Fidelity
- Discount brokers such as E-Trade or TD Ameritrade
- A robo-advisor such as a service like Betterment, Wealthfront, and M1 Finance.
U.S. Treasury Bonds
If you’re really craving safety and security, then U.S. treasury bonds can be a good place to invest new money. There’s no risk of default since the government can literally always print more money if they needed it.
Just remember that bond prices tend to go up during recessions because demand increases as investors pull their money out of the stock market. While an increase in value can seem attractive, that can actually cause a decrease in the overall yield of the bond value.
Like bonds, precious metals such as gold and silver tend to see their value increase during a recession as investors look for safety. Just remember that the prices will then go back down as the market starts to become more stable.
During the Great Recession, the value of gold went from $800 per ounce up to $1,921 in 2011. As the economy returned to prosperity, the price went back down and was last at $1,575 as of 2020.
Remember: Don’t Try To Time the Market
When it comes to market cycles, nearly everyone has a prediction about when a recession is going to hit, how low it will go, and when it will end.
… and they will most likely be wrong.
No one can look into the future and tell you that’s it’s going to be a good or bad day to invest. Anyone who tells you otherwise is playing a dangerous game called trying to “time the market”. As expert after expert can tell you, it’s simply impossible to predict if the market is going to dip or when you’ve hit the bottom.
That’s why the best strategy is always just to stay the course, continue to make investments, and take full advantage of dollar-cost averaging.