How to Invest During a Recession
The recession alarms have been sounding a lot in 2022, causing many investors to be worried about how to invest during a recession.
With inflation at levels not seen in 4 decades, stocks falling into a bear market territory, and the S&P 500 sliding to a 4-year low, investors are searching for strategies to invest during these volatile times.
Looking at performing your investments when the stock market or economy looks to be on shaky footing may cause a sense of dread.
You may be confused about how you can navigate the moment. But just because your investments may trend downward doesn’t mean you should let fear lead you to make impulsive decisions like pulling your money out of the market and locking in losses.
Read on to learn why staying the course during a recession can be beneficial and how you might enjoy some long-term rewards when you enter the market, even in the depths of a downturn.
What Is A Recession?
A recession refers to a contraction in economic activity, often defined as two or more consecutive quarters of decline in the nation’s real GDP.
Recessions have wildly varying depths and durations. According to the National Bureau of Economic Research (NBER), most recessions last only a year.
The recent coronavirus pandemic was the shortest recession in history (2 months) but the most intense (GDP was down by nearly one-third).
So, while a recession can be scary while it lasts, time is likely on your side.
Above All, Do Not Panic
Don’t be too concerned about transitory market changes.
Markets will occasionally turn bearish, maybe even crash amid a lengthy downturn. But they invariably bounce back, and the markets may scale even higher peaks when this happens.
By staying the course and sticking with your investment strategy, the market recovery could help you recover any losses and possibly see some gains.
What Should I Invest in During A Recession?
It’s a fact that some investments do better than others during recessions.
Cyclical, highly leveraged, and speculative assets perform poorly during recessions. A company that falls into any of these categories can be risky for you because it might go bankrupt.
Conversely, companies in traditionally recession-resistant sectors, such as essential consumer goods, healthcare, utilities, IT, communication services, and defense, thrive.
Although they don’t offer high returns like stocks, government bonds are much safer options considering their history of a predictably steady flow of repayment.
Some investors might seek even more defensive positions during an economic downturn by investing in established, dividend-paying stocks or buying real estate and precious metals (gold and silver).
Also, some investors may look to move some money out of riskier investments and into cash and cash equivalents. Having money invested in money market funds and CDs or having adequate cash on hand may be a good option for a portfolio during a recession.
Investing Strategies for a Recession
In a recession, how you invest can be just as vital as what you invest in.
The following investing strategies can help you weather a recession:
- Dollar-Cost Averaging (DCA)
Simply put, dollar-cost averaging is a systematic way of regularly investing a fixed amount of money.
This approach often describes how most Americans invest–on a paycheck-by-paycheck basis, through employer 401 (k) and 403 (b) plans.
Dollar-cost averaging spreads the cost basis of over an extended period and wide-ranging prices. By doing so, it offers insulation against market fluctuations.
During times of rapidly rising share prices, you’ll have a higher cost basis than you otherwise would have had. During collapsing stock prices, you’ll have a lower cost basis than you would have had.
Taken together, this approach can help you pay less for your investments on average over time and help to increase long-term returns.
- Buy and Hold
This is a passive strategy whereby you purchase stocks, ETFs, and other securities and hold on to them for an extended period.
By buying and holding, you believe you’re likely to earn long-term investment returns despite whatever short-term market volatility may come your way. You think an extended time horizon allows you to ride out short-term dips in the market.
This approach can also help you avoid trying to time the market or emotional investing.
- Tax-Loss Harvesting
An economic downturn can also be an opportunity to sell out of a mix of investments owing to tax considerations.
You can take advantage of tax-loss harvesting by selling mutual funds and stocks that have appreciated alongside those that have lost value.
This approach allows you to use investments that have dropped in value to offset investment gains and potentially minimize your annual tax bill.
When you want to offset capital gains taxes you owe on investments you’ve sold, tax-loss harvesting can allow you to deduct $3,000 in losses per year. Tax-loss harvesting can be the silver lining on investments that did not work out.
Should Investors Expect a Recession in 2023?
Forecasting recessions isn’t easy, and the experts often get it wrong.
Some recession warning signs are worth watching out for – reduced consumer spending, mass layoffs, and decreased business investment.
Inflation is running high in the US, and the Federal Reserve is raising interest rates to cool the economy and bring prices under control.
But with so much going on around the world–the Russia-Ukrainian war, choked-up supply chains, and the volatile energy market–a global recession that, in due course affects the United States may occur.
So, there’s a possibility that the United States will be in or enter a recession in 2023, but it’s not guaranteed.
IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.