The COVID-19 crisis continues to dominate headlines, and many investors are understandably rattled. Seeing a drop in stock market values has a way of igniting fear, especially when it’s coupled with a parallel spike in unemployment. But if you’ve been around the block long enough, you know that these things simply come with the territory when the country is in a recession. The encouraging news is that whether we’re talking about a pandemic, war or housing crisis, the economy has historically bounced back after past recessions.
And here’s a kicker you may not be expecting—many smart investors actually set themselves up to thrive during down markets. Those who are able to tune out the noise, keep their emotions in check and stick to their long-term investing plans tend to weather recessions better than those who let fear take the wheel.
What is a recession?
An exact definition is a little tough to pin down, but most economists agree that a recession is occurring when a country’s gross domestic product (GDP) has exhibited at least two consecutive quarters of negative growth. This kind of slump tends to be the result of an economic slowdown that’s typically accompanied by an uptick in unemployment and a decline in manufacturing and stock prices. Not surprisingly, consumer confidence usually takes a hit.
Investor behavior usually gets fearful, as well. As asset values, including stocks, begin declining, many investors end up panic selling in an attempt to free up cash in the short term or safeguard their portfolios. (FYI, the latter usually backfires because it means missing out on future returns when the market eventually rebounds.)
The coronavirus has brought economic activity to a halt worldwide, and it looks as though the U.S. is indeed in recession territory at this point. A recent National Association for Business Economics survey found that many economists are expecting GDP to shrink by 26.5 percent in the second quarter of this year.
Investing during a recession
This may feel counterintuitive, but a down market is actually one of the best times to invest because we generally see a drop in asset prices. That means stocks, bonds and mutual funds are likely cheaper than they are during a bull market. In other words, stocks are essentially on sale right now and prices are dropping in kind.
Take advantage of dollar-cost averaging
Experts agree that one of the easiest ways to take advantage of this is to leverage a strategy called dollar-cost averaging. All this means is investing on a schedule and sticking to it, regardless of market ups and downs. If you have a 401(k), you’re already doing this. (If you’re an Acorns investor, you’re also doing this if you have Round-Ups or Recurring Investments enabled.)
Now is the time to continue kicking into your retirement funds and other investment accounts—even upping your contributions if possible. Staying committed over the long term and locking in these investments with automatic contributions means that you’ll be able to take advantage of future dips in the market when they eventually come, and you won’t be spooked into pulling out during periodic downturns.
Just keep in mind that investing now means that you’ll have to wait until the market kicks back up to realize future returns.
Maintain sufficient savings
Maintaining a healthy savings account is critical to your investment plan and overall financial health, too. As we hinted at earlier, one of the major reasons behind the massive sell-off we’re seeing in the market right now is that many people need cash now. One in four Americans have either lost their job or experienced a pay cut because of the coronavirus shutdown, according to a recent CNBC survey. For many, selling stocks at a loss is their best worst option.
This pandemic is underscoring just how important it is to have cash reserves on hand should disaster strike. Most experts suggest stocking up your emergency fund with three to six months’ worth of expenses. The idea is to keep this money in a bank account so that you’re able to access it quickly if you’re financially strapped. A high-yield online savings account is a great option in terms of earning the most on interest.
Investing strategies for a recession
Consider dividend-producing stocks
In addition to dialing up your retirement contributions, a recession is also a great time to leverage different investing strategies. If guaranteed income is a priority, and for many it is, look to dividend-producing stocks. Some companies pay out periodic earnings to shareholders called dividends. This is on top of regular earnings. During a down market, these types of stocks could position you to continue to earn money, despite volatility. (And if you can reinvest them, all the better.) According to Siblis Research, the average dividend payment for U.S. stocks at the end of 2019 was 1.8 percent of the original investment.
Research which sectors are poised to grow
Another thing to think about are the sectors that are poised to stay active during and after the recovery. While this is impossible to predict with certainty, data shows some sectors have grown in this stay-at-home economy like e-commerce, food delivery, telecommuting services and the like. Healthcare services, particularly ones with remote capabilities like telemedicine, could be another sector that sees growth during the economic turnaround.
Invest in a diverse mix of stocks
Investing in a variety of industries should serve you when it comes to keeping your portfolio diversified, which helps mitigate risk. Going with exchange-traded funds (ETFs) and low-cost index funds, which can include hundreds of different stocks, also provide the opportunity to diversify and balance risk so you’re more likely to benefit from the eventual market recovery.
Smart investing principles
Whether we’re in the throes of a recession or not, it’s always wise to keep up smart investing principles—it’s the best way to grow wealth over the long term, after all. In addition to staying invested, keeping your portfolio diversified, and reinvesting dividends (which Acorns does for you), try and keep your timeline in mind.
Keep a long-term perspective
If you’re a long way out from retirement, market turbulence in the short term shouldn’t cause you too much stress. History shows that they’re perfectly normal parts of the economic cycle, and things tend to bounce back. After the Great Recession, it took roughly four years for the Dow Jones Industrial Average to eventually hit a new high. But here’s a little secret: long-term investors who stuck with it were the ones who were positioned to net the greatest gains.
Consider your goals
Your goals play a big part in your investing habits, as well. If you’re saving for your kids’ education, for example, a 529 plan is usually your best bet. And while a regular brokerage account is a great place to grow your wealth slowly to fund long-term goals, saving for retirement in a 401(k) and/or Traditional or Roth IRA will open up tax breaks you can’t find anywhere else.
When all is said and done, a recession shouldn’t really affect your long-term investing plan all that much. The trick is to keep your emotions in check and, if possible, invest even more during market downturns. A well-thought-out investment plan is one that’s built to withstand market volatility and slumps, which is an inherent part of investing.
Investing involves risk, including loss of principal. Past performance does not guarantee or indicate future results. This information is being provided for informational purposes only, and is not intended to provide, and should not be relied on, for accounting, legal or tax advice. You should consult your tax or legal adviser regarding such matters.