Should you invest during a recession?
If you’re invested for the long term, a looming recession shouldn’t set you off into a panic. Recessions are a part of the business cycle. They occur periodically and can impact the financial markets. Let’s dive into how you should think about investments in a recession.
“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
What is a Recession?
A recession is typically defined as a decline in GDP for two or more consecutive quarters. A recession is normally accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market.
Stocks: While stocks tank during a recession, they bounce back quicker. Typically, the stock market begins to fall from its peak months before the actual recession starts. It also starts to recover before the recession technically ends.
What strategies can I follow for investments in a recession?
Market fluctuations might affect traders, but for investors, the underlying value of the company they buy in should matter the most. Dollar Cost Averaging:
Dollar-cost averaging is the strategy of spreading out your stock purchases and buying at regular intervals and in roughly equal amounts, ideal for maintaining investments in a recession. It can be especially powerful in a bear market, allowing you to “buy the dips,” when most investors are too afraid to buy. Committing to this strategy means that you will be investing when the market is down, and that’s when investors score the best deals.
One final tip to add to dollar-cost averaging: Many stocks pay dividends, and you can often instruct a brokerage to reinvest those dividends automatically. That helps you continue to buy the stock and compound your gains over time.
Dividend Aristocrats:
Dividend aristocrats are a group of stocks that have not only paid dividends for at least 25 consecutive years but have also increased their dividend payout each year. The focus here is not so much on yield, but on dividend growth as a sign of solid management, business growth, and stability whilst keeping their investments in a recession.
Investments in Healthcare, Utilities, and Consumer goods sectors while in a recession:
Consider investing or holding on to investments in a recession in the healthcare, utilities, and consumer goods sectors. People are still going to spend money on medical care, household items, electricity, and food, regardless of the state of the economy.
For the most part, your strategy should be to hold to long-term investments and dollar cost averaging. Do not sell when the prices are low. You may think you’ll get back in when the stock market has hit the lowest, but it’s impossible to call a bottom until it has passed.
Stocks that have been paying a dividend for many years are also a good choice since they tend to be long-established companies that can withstand a downturn.
Some of my favorite Dividend Stocks
Happy Investing! 🙂
1 comments
Very good.