- Whether there is a recession or none, index funds have proven to be an excellent addition to an investment portfolio.
A recession is when the economy falls for two or more quarters consecutively. It is also a time when we can see a rise in job losses, stimulus, and unemployment benefits.
The sustained decline is theoretically disadvantageous for existing investment portfolios, making some think whether betting on businesses during a recession is a smart thing to do or it’s safer to keep their investment dollars in cash.
Possible Investment Options in a Recession
Whether there is a recession or none, index funds have proven to be an excellent addition to an investment portfolio. By putting money into index funds, particularly the S&P 500 index funds, you’re investing in the US’s long-term profitability.
Of course, it’s understandable if you prefer individual stocks over index funds. In any trading environment, perhaps the best move you can make is to buy good shares and stay invested in them for as long as they’re able to maintain their quality.
An investment’s quality becomes more critical when the economy is in a slump. During the pandemic and subsequent recession, companies with solid balance sheets were able to endure the difficult situation better than the businesses that lacked the necessary financial flexibility at that time.
As a result, the companies that managed to pull through caught the interests of long-term investors, while the companies that didn’t saw their stocks taking considerable losses or ended up shutting down their businesses completely.
Your approach to investing is as important as your choices of investments when the economy is in recession. Stocks often have high volatility levels during recessions; therefore, you’re better off not trying to time the market and purchasing every security simultaneously.
Instead, opt for a strategy that involves investing the same amount every month or quarter, i.e., dollar-cost averaging (DCA). That way, you have the chance to buy more shares if the stock’s price continues to go down.
If the price starts to recover, you’ll be able to buy more shares at a discount and fewer shares once the stock becomes pricey. Overall, recessions provide investors the opportunity to invest in quality stocks at affordable prices.
Knowing If You’re Ready to Invest in a Recession
A recession is an excellent time to buy stocks for less than their usual market prices, but not every investor can do that.
While they are not obligatory, investing in a recession has its conditions that you should at least meet:
You’re Investing for the Long-Term
Investing during a recession is not for investors looking to make short-term money or those who can’t cope with losses. You may think you’re investing on the cheap, only to see your portfolio value slide days later.
That is why long-term investors are better fit to take on the markets at times like this. Recessions are a normal part of long-term investing, and long-term investors tend to recover eventually from such a difficult situation.
So, if you plan to invest during a recession, consider keeping your holdings for about seven years.
You Have Enough Emergency Funds
It’s always a good idea to have enough cash on hand or in the bank to keep you covered financially for three to six months or longer. If you have already saved enough for a rainy day, you choose to invest that money. If not yet, focus on building your emergency fund first.
Investing during a recession is a good idea, if you’re financially prepared and have a workable strategy. Investing for the long term is great, but don’t sacrifice your near-term financial security just to achieve that.
Remember, paying your bills comes first, and you have all the time in the world to increase your investments later.