Inside Creative House/Getty Images
A recession or economic downturn can be an unsettling time for investors and their finances. Stock prices often fall just as the economy starts to slow and workers get anxious about potentially losing their jobs due to the slowdown. But recessions can actually be one of the best times to invest. Here’s what you should know about investing in stocks during a recession or market downturn.
Market downturns
Market downturns are inevitable for long-term investors, so they shouldn’t come as a surprise when they occur. Since 1929, investors have seen 22 bear markets, or declines of 20 percent or more from a recent high, with their severity varying greatly. Some downturns see prices fall and recover quite quickly, as they did during the first half of 2020 when investors were concerned about the impact of the COVID-19 pandemic. Other downturns take longer to recover from.
But these market downturns create opportunities for long-term investors. Stocks fall as investors anticipate lower earnings during a recession and concerns grow about the economic outlook. If people only bought stocks when the outlook was good, they’d likely end up with a mediocre investment record. As legendary investor Warren Buffett has said, “The future is never clear; you pay a very high price in the stock market for a cheery consensus.”
Preparing to take advantage of market downturns is one of the best things you can do as an investor and the impact can be substantial over time.
Impact of investing during a recession
Chris Davis, chairman of New York investment management firm Davis Advisors, often quotes his grandfather as saying, “You make most of your money in a bear market – you just don’t realize it at the time.”
Davis Advisors conducted a study to illustrate this point. Consider three hypothetical investors who had invested $10,000 in an at the 2007 market peak. When the global financial crisis hit in 2008 and 2009, sending stocks lower, the three investors had different reactions:
- Nervous investor: Sold all their stocks following the market downturn at the low on March 9th, 2009 and invested in cash.
- Patient investor: Held their stocks throughout the market downturn, staying invested.
- Savvy investor: Viewed the downturn as an opportunity and invested an additional $10,000 in stocks at the low on March 9, 2009.
The three different reactions led to significantly different results. The nervous investor ended 2022 with $5,138, while the patient investor ended 2022 with $33,420. Incredibly, the savvy investor, who added to their investments at the market low, ended 2022 with $108,119.
It’s easy to look back with hindsight and see the savvy investor’s approach as rather obvious. But it probably didn’t feel like an obvious decision at the time. At the depth of a recession, the news is filled with stories about how bad the economy is and commentators opine on whether things will get even worse. But even if you don’t invest exactly at the market bottom, you can still boost your long-term returns by adding to investments during a downturn.
How to buy stocks during a downturn
There are a number of ways you can increase your investments in stocks during a downturn.
Rebalance your portfolio
One of the simplest ways to boost your stock holdings during a downturn is to rebalance your portfolio. As prices move around, the overall weighting in your portfolio moves around too. When stock prices fall, they’ll account for less of your portfolio if other investments like bonds have fallen by less. Moving your portfolio allocations back to your desired amounts, or even increasing your allocation to stocks, can help set you up for strong returns once the downturn passes.
Increase retirement account contributions
Another way to increase your exposure to stocks during a downturn is to increase your contributions to your retirement accounts, such as a 401(k). You can automatically have more money withheld from your paycheck to go toward your 401(k) and can always change it if the downturn ends or your circ*mstances change.
If you’ve already maxed out your 401(k), consider contributing to a traditional or Roth IRA. These accounts come with more investment options, but still have similar tax advantages to 401(k) plans.
Buy stocks directly in a brokerage account
Of course you can also buy stocks through a brokerage account and contribute whatever amount you’d like. Buying through a brokerage account will give you the most flexibility when it comes to investment options and withdrawals. You can withdraw money from a brokerage account at any time, but you’ll pay taxes on any gains, whereas early withdrawals from retirement accounts typically come with a penalty.
Bottom line
If you’re able to increase investments in the stock market during a downturn, it can be a great way to boost your long-term returns and achieve your investment goals. Buying stocks during a recession isn’t easy, as there’s often a lot of negative news to digest, but it can be rewarding if you can stomach the short-term noise. Consider boosting your contributions to retirement accounts, rebalancing your overall portfolio toward stocks or buying directly in a brokerage account to take advantage of low prices.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
FAQs
A stock fund, either an ETF or a mutual fund, is a great way to invest during a recession. A fund tends to be less volatile than a portfolio of a few stocks, and investors are wagering less on any single stock than they are on the economy's return and a rise in market sentiment.
Should you buy stocks before or during recession? ›
Wise investors will view recessions as opportunities. Stocks tend to rebound strongly after a recession. As a case in point, look at how the S&P 500 has performed since the short recession caused by the COVID-19 pandemic.
Is it good to invest during a recession? ›
During a recession, you might be inclined to give up on stocks, but experts say it's best not to flee equities completely. When the rest of the economy is on shaky ground, there are often a handful of sectors that continue to forge ahead and provide investors with steady returns.
Do any stocks do well in a recession? ›
Recession stocks are defensive stocks that can sustain growth or limit losses during an economic downturn because their products or services are always in demand. The best recession stocks include consumer staples, utilities and healthcare stocks.
Should I leave my money in the stock market during a recession? ›
You could make a lot more money by investing in the stock market, but the stock market can be volatile, especially during recessions. New investors should consider what to invest in during a recession. The advantage of investing in stocks during a recession is that you can often buy at a discount.
What gets cheaper during a recession? ›
Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same. In contrast, things considered to be wants instead of needs, such as travel and entertainment, may be more likely to get cheaper.
Who benefits during a recession? ›
Lower prices — A recession often hits after a long period of sky-high consumer prices. At the onset of a recession, these prices suddenly drop, balancing out previous long inflationary costs. As a result, people on fixed incomes can benefit from new, lower prices, including real estate sales.
What not to invest in during a recession? ›
If you decide to make some changes to your investment strategy in response to economic concerns, there are ways to reduce your risk. Most stocks and high-yield bonds tend to lose value in a recession, while lower-risk assets—such as gold and U.S. Treasuries—tend to appreciate.
Where is your money safest during a recession? ›
Still, here are seven types of investments that could position your portfolio for resilience if recession is on your mind:
- Defensive sector stocks and funds.
- Dividend-paying large-cap stocks.
- Government bonds and top-rated corporate bonds.
- Treasury bonds.
- Gold.
- Real estate.
- Cash and cash equivalents.
Toothpaste, deodorant, shampoo, toilet paper, and other grooming and personal care items are always in demand. Offering these types of items can position your business as a vital resource for consumers during tough times. People want to look good, even when times are tough.
Rental Agents and Property Management Companies
Rental agents, landlords, and property management companies can thrive during a recession, when renting is likely to become a more appealing housing option.
Should I sell my stocks now in a recession? ›
The Bottom Line
Panic selling when the stock market is going down is more likely to hurt than help your portfolio. Moreover, you're locking in those losses. This is why it's important to understand your risk tolerance, your time horizon, and how the market works during downturns.
Will stock market go up during a recession? ›
During the recession phase of the business cycle, income and employment decline; stock prices fall as companies struggle to sustain profitability. A sign that the economy has entered the trough phase of the business cycle is when stock prices increase after a significant decline.
What stocks hit hardest in a recession? ›
On the negative side, energy and infrastructure stocks have been the hardest-hit in recent recessions. Companies in these sectors are acutely sensitive to swings in demand.
Is it better to save or invest during a recession? ›
If you don't have a healthy emergency savings account, you may want to prioritize that before you invest more during a crisis or recession. Setting aside funds for a financial hardship, such as a job loss, or temporary illness or disability, should be a high priority regardless of economic conditions.
Should you wait for a recession to invest? ›
As such, it's always a good idea to be ready for a recession. And you can do so by maintaining a strong emergency fund and steering clear of high-interest debt. But you shouldn't let recession-related worries stop you from investing your money and taking advantage of the opportunity to grow wealth over time.
Do stocks bottom before or after recession? ›
In almost every case, the S&P 500 has bottomed out roughly four months before the end of a recession. The index typically hits a high seven months before the start of a recession. During the last four recessions since 1990, the S&P 500 declined an average of 8.8%, according to data from CFRA Research.
Should I pull my investments before a recession? ›
As companies cut back and job losses mount, “it's better to be safe than sorry and beef up cash reserves during times of high employment.” However, selling investments to get cash in anticipation of a recession is risky. You might sell prematurely and get trapped in cash as markets rise.
Where is the safest place to put your money during a recession? ›
Cash and Cash Equivalents
Money market funds and high-yield savings are also places to salt away cash in a downturn. Holding cash provides a safety net, allowing investors to jump on opportunities that may arise during economic downturns, such as purchasing undervalued assets when markets decline.
Is it better to have cash or property in a recession? ›
Cash is an important asset when it comes to a recession. After all, if you do end up in a situation where you need to pull from your assets, it helps to have a dedicated emergency fund to fall back on, especially if you experience a layoff.
