Investing during a recession

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Investing can be daunting even during the best of times—but when a recession hits, it can be that much more confusing.

As stocks plummet in response to a global crisis, investors may be concerned about their existing holdings, and those considering investing for the first time may be scared off of the idea entirely.

But while a bear market can be intimidating, it doesn’t mean the best investment strategy is to shut down entirely. In fact, volatility may offer investors the opportunity to buy low and make appreciable gains as the market corrects itself.

Observing certain best investment practices during a recession might help keep a portfolio as balanced as possible during turbulent times—and create a strong foundation to help savers ride through to the other side successfully.

Here’s what investors need to know about keeping afloat when the going gets rough.

Related: Investing for beginners

Investing in a Normal Market Economy

Before diving into the nitty gritty on investing during a recession specifically, it might be helpful to take a step back and review how investing works in ordinary time.

The stock market is an exchange on which investors buy and sell assets, such as stocks, bonds, and cash equivalents.

Understanding stocks, and understanding the stock market itself, takes time and research. It’s not intuitive to most new investors.

The most fundamental rules are simple—and are often learned in grade school.

Common Investment Assets in the Market

Stocks are perhaps the best-known class of assets, and thus what the market is named for. They’re also known as shares and are fractions of a publicly traded company.

Trading stocks can help investors earn money in two main ways. The first is the ability of such stocks to increase in value as the companies that issue them grow and perform. When investors buy stocks at a lower price and sell them at a higher price later, they get to keep the difference as profit.

Some stocks also offer their holders the ability to earn dividend income, which are portions of profit paid directly to shareholders on a regular basis.

Investors can also earn money by purchasing bonds, which are essentially loans taken out by a government or corporation with given terms for the lifespan and interest rate of the agreement.

Other investment options include cash equivalents (like money market accounts), commodities (raw materials like grain, beef, or metal), and alternative investments (like real estate or fine art).

Gauging your Investment Risk

That said, it’s important to understand that all investments carry risk, and there’s always the potential to lose everything in a serious market downturn. However, those who play the long game tend to win out over time.

Over the course of time between 1957 to 2018, the S&P 500—an index tracking 500 of the largest companies publicly traded on American markets—saw an average annual return of 8%. Including data back to 1926, that figure rose to 10% to 11%, which includes the Great Depression.

But market volatility is a reality, and the fact remains that investing during a downturn can be downright scary. It makes sense, then, that many investors seek out advice on the best ways to maintain their portfolios during turbulent times.

And while this article is not attempting to offer specific investment advice, there are some general tips to help mitigate the fear and pressure.

Options For Investing During a Recession

There are some differences in the ways investors approach their portfolios depending on whether it’s a bear or bull market.

But in the face of market freefall, there are some potential options.

Pulling Everything Out

A falling market line means many existing investments are decreasing in value—which may cause some investors to panic and sell everything they’ve got. (That’s part of what perpetuates the downturn in the first place.)

But a massive sell-off may be exactly the wrong move when prices are dropping. Keeping assets in place is more likely to offer recuperation in the long run, especially since bear markets are almost always followed by even more extreme bull trends.

While selling assets during a downturn may feel safer to some investors, it might make it much harder to regain the profit that’s been lost.

Such an investor would lose money on the sale of their assets thanks to the low recession prices, and then pay a higher price to repurchase when the prices go back up.

Investing More While the Market Is Down

Although buying more during a downturn might sound like exactly the wrong move, history reveals that it can be a worthy strategy—for the exact same reason selling everything is likely the wrong move.

During a bear market, prices are low, which means there may be more room for profits once performance returns.

Some research  suggests the average gain of a bull market tops 120%, while the average bear market falls just under 30%, which means the earning potential is far greater than the loss risk.

Considering Talking to a Financial Advisor

While nobody can predict the market with certainty, qualified financial advisors make their living by helping their clients figure out how best to allocate their wealth—and keep as much of it as possible.

The advice of such an specialist can be a great way to maintain a calm, collected approach and get some confidence in an otherwise stressful time.

SoFi for instance offers complimentary financial planning to help clarify financial picture and prepare you for the future.

Investments Historically Considered Risky vs. Safe

There are historical trends about which types of investments seem to perform well during a recession and which may be better left for an upward trend line.

Investments Typically Considered Risky During a Recession

While no investment is risk-free, some investments are considered to be riskier than others—and a recession is probably not the right time to try out cyclical or speculative companies or those that are in a high amount of debt.

If a company’s ability to perform is already in doubt, a serious economic downturn is unlikely to make things better.

In short, if a company’s ability to perform is already in doubt, a serious economic downturn is unlikely to make things better.

However, as mentioned above, it could also be a risky move to sell off any existing investments as a response to market panic.

Many people advise against rebalancing a portfolio during a downturn, as it can be difficult to accurately predict each asset’s performance.

Keep in mind, too, that some companies may take steps to mitigate market losses, such as initiating stock buybacks or temporarily cutting back on dividend payments.

Investments that Typically Perform Well in Recessions

If an investor is considering making new investments during a recession, they may want to consider strong companies that exhibit good management, reliable cash flow, and low debt.

This is one situation in which evaluating stocks thoroughly before making an investment decision is critical.

It’s also the case that certain industries have proven to resist the influence of recessions more so than others, including:

•   Utilities like energy and water.
•   Consumer staples like food and household goods.
•   Certain retailers, particularly in the discount market, like large, nationwide franchise stores.

Certain alternative assets, like commodities, tend to work in opposition to the market.

A qualified financial planner can also help discern how and where to invest during a recession, perhaps even pointing out specific stocks and other types of assets. A financial professional can also help investors maintain the emotional consistency necessary to weather market swings without making rash decisions.

Preparing For a Recession

One tactic for maintaining a balanced portfolio (and just maybe a lower stress level) during a recession is to consider preparing for the eventuality of such a downturn ahead of time.

One of the simplest ways to prepare for a recession is to take the time to understand what they are and how they work.

Recessions can be caused by a variety of factors, from a drop in consumer confidence thanks to major crises like global pandemics (sound familiar?) to increased inflation or rising national interest rates as set by the Federal Reserve.

It might also be helpful to understand the consequences and effects of economic downturns ahead of time, so they might not feel so overwhelming and frightening once they occur.

At the basic level, understanding that asset values do fluctuate and sometimes fall—even during normal market performance—can keep such an event from seeming like a catastrophe.

Recessions may cause job loss, stress, and other negative effects, but they do tend to have some positive effects, too.

For instance, a recession can lead to lower real estate prices and loan rates, which may make it easier to buy property. And companies in the retail or service industries, attempting to avoid total failure, may ramp up their customer service practices.

One important financial move that consumers are advised to do, not only in the case of a recession but also as a regular practice, is to create an emergency fund.

Falling trend lines might feel a lot less scary if there is enough ready cash to get through the turbulence.

Most professionals recommend an emergency fund of at least three to six months’ worth of expenses, though some people may choose to accumulate more if possible.

Perhaps the most important way to prepare ahead of time for a recession is to ensure investment portfolios are well diversified.

One easy way to buy into a wide range of assets with one swift move is to invest in ETFs (exchange-traded funds) or mutual funds, which are pre-curated baskets of assets across a range of classes and companies.

These types of assets allow investors to purchase a small piece of different stocks, bonds, and other assets without having to do all the footwork—or pay all the trade fees—of researching and purchasing those assets separately themselves.

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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

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