The S&P 500, which is a good index of how well the stock market is doing, is down more than 20% in 2022. Dow Jones fell 15.3%, Nasdaq 29.5%, and Bitcoin 59%. This drop is making everyone worried and wary.
But the truth is a recession is always almost temporary, and stock prices do bounce back up. All your investments will then go up, and you will get that delightful surge in portfolio value after if you invest during a recession. Keep reading to find out more about investing in a recession and why it’s a better idea than you might imagine.
Look at Historical Data on Recessions
This is not the first time we are going through a recession, and it won’t be the last. But we can definitely look at historical data to learn from recessions and how to invest better during them.
If you look at the average declines during a recession and the bounce back up after, these are what the numbers look like. The average decline is 29% from the peak before the recession. That is a huge drop.
But, the average peak 1 year after the though (the lowest point) is 40% and 2 years after is 54%!! These are astronomical figures and something to pay attention to.
Since these are just averages, some recessions bounce back even better than this.
That’s the whole point of investing in a recession. You are staying in the market, and you can take advantage of these brilliant gains after.
Not only that, but a recession is pretty much built into the stock market. And US stocks start declining way before a recession starts, and they tend to bottom out way before a recession actually ends. Even if the recession is going, your stock prices might already be on their way up, and you want to take advantage of that upward trend by staying steadily invested in the market.
Dollar-Cost Averaging
The most important reason you need to keep investing in the market is dollar-cost averaging. You’ve probably heard of this investing strategy many times before, but its benefits peak when you invest during a recession.
Why is that? Well, when you keep buying bits of the stock every week or month, even during a recession, you are getting the stock at an immense discount.
For example, if you buy 25 shares of a stock at its peak price of $100, you pay $2500. But if you buy 25 shares of the stock at its recession price of $50, you pay $1250. You get the same number of shares for a lower price.
When this stock goes back up to its peak price or higher, you can rest assured that you were able to get a lot more of the stock for cheaper during the recession. It’s a great way to get bargain deals on normally expensive stocks like Apple, Amazon, and Google.
You Can’t Time the Market
And you don’t even have to think about it too much. Set up automatic investing orders, which buy a certain amount of shares every week or every month without fail and your undue interference.
The problem with regular investors is that they are the main deterrent factor when it comes to being successful in investing. The more you can stay hands-off with your investments, the better off you will be in the end.
You’ve probably heard of this study from Fidelity. Its best investors were either dead or inactive. Now you don’t have to go as far as dying, but you can definitely stop letting your emotions get the better of you, especially when investing in a recession.
Don’t even make the dire mistake of thinking that you would be able to time the market. You can’t do it.
Not unless you are an expert investor who’s been working in the market for years or decades now. And even then, you would be wrong most of the time.
Instead of timing the market, or trying to, the best way is to stay invested in the market by buying little bits every month.
Keep Going and Invest During a Recession
Don’t think that you need a different strategy when a recession comes. Yes, you might want to invest a bit more into investments like bonds which go up during a recession. But this doesn’t mean that you abandon your stocks completely.
And it definitely doesn’t mean that you need to sell all your stocks and get out of all your investments. Unless you are about to retire soon and you worry that you will lose too much of your investment during the recession, then you can consider pulling some of your investments out of the stock market.
But even then, be extremely careful with this move, and if you can be patient and wait for the recession to end, it will be even better for your portfolio.
The ideal would be if you could keep going with whatever strategy you’ve chosen even during a recession. Don’t let your overthinking or interfering ways stand in the way of you being a successful investor.
Opportunities Galore During a Recession
Change your mindset and start thinking of recession times as times filled with opportunities to invest in bargain-priced stocks. You might have thought that you would love it if Apple went back to its price when it first IPOed. Well, during a recession, it’s highly plausible that might actually happen.
So why not take advantage of it, instead of cowering on the sidelines and being fearful of everything in the stock market? If you need support with your investment strategy or financial planning of any kind, schedule a time to chat with us. Invest during a recession and beyond with us.
