Investing During a Recession

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Should you invest during a recession? Warren Buffett noted in a 2008 Berkshire Hathaway shareholder meeting that the market might go up, the market might go down, the economy might fluctuate, but there will always be intelligent things to do. That’s an empowering message, and he carried it even further in his 2008 letter to the shareholders of Berkshire Hathaway.

Warren Buffett's Perspective

Buffett said, “In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21½% prime rate in 1980; and a Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has no shortage of challenges.

Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497.”

It was during these challenging times that all the great fortunes were made. Research has indicated that only 10% of millionaires in this country inherited their wealth, while the other 90% earned it. These people didn’t sit and home and bemoan their misfortune because of a recession or a depression hit.

The Definition of a Recession

There's no one single, technical definition of "recession." Journalists often apply different terms—often timelines—than economists. Most agree, however, that it means more than just a few months of depressed economic activity occurring after a point in time when the economy has peaked. Most recessions are relatively brief.

Recessions Can Present Opportunity

Opportunities are around all the time if you're looking for them and welcome them when they present themselves. A recession can be the best possible time to begin investing because asset prices often fall hard. You can pick up stocks, bonds, mutual funds, real estate, private businesses, and more for far less than you could just a few years earlier.

You can step in and pick assets up for a fraction of their value ass other investors are forced to dump them.

It's Not for the Faint of Heart

It takes courage to invest when the economy is down. You probably won't buy at the absolute bottom. You’ll have to watch your portfolio fall a little further after you’ve made your investment. That's why experts recommend that you only wade into the market through a dollar-cost averaging plan instead of pouring all of your capital in at once.

These drops shouldn’t concern you if you won’t be forced to sell early.

Investing As a Small Business Owner

Investing in a recession—especially or additionally into your business—can make sense if you're a small business owner and you're disciplined. You must protect your cash and not stretch further than you can responsibly expand. You're free to take business from your competitors as they pull back their advertising dollars or lay off staff, accumulating more investable dollars.

Many of the greatest retail fortunes in the United States were made by entrepreneurs who expanded their storefronts during recessions despite not selling anything at the time.

Shuttering doors instead can be catastrophic in times of economic pressure. As an example, Starbucks closed some 60 stores and canceled new shop openings back in late 2007 in response to a year-to-year drop in sales. Its share price plummeted and continued to drop through the end of 2008.

And it can help considerably if you're selling a need rather than a luxury. People still have to eat in a diving economy, although they might not need gourmet coffee. Grocers might do well in a recession while Starbucks stumbled. Likewise, sellers of discount products are likely to do well in these times.

It Doesn’t Matter If You Have a Plan

The bottom line is simple: It's almost inconsequential if you begin investing in a recession if you have the basics in place, you’ve invested in health insurance, you practice dollar-cost averaging, you ​reinvest your dividends, and you focus on reducing risk.

Given enough time, you should experience more than satisfactory results, allowing you to build your wealth.

Article Sources

  1. Berkshire Hathaway, Inc. "Berkshire’s Corporate Performance vs. the S&P 500." Page 3. Accessed March 24, 2020.

  2. Foundation for Economic Education. "9 of the 10 Richest People in the World Are Self-Made Entrepreneurs." Accessed March 24, 2020.

  3. Federal Reserve Bank of San Francisco. "What Is the Difference Between a Recession and a Depression?" Accessed March 24, 2020.

  4. Harvard Business Review. "Five Rules for Retailing in a Recession." Accessed March 24, 2020.

  5. Economics Help. "Who Benefits from a Recession?" Accessed March 24, 2020.