Should You Invest During a Recession?
How you may be able to make money investing in a recession
When the economy is down, it’s natural for investors to be curious about how to make money investing in a recession. While certain investments, such as stocks, can be more volatile in a down market, investors may be able to benefit from a recession if they follow these basic and timeless strategies.
How to Make Money Investing in a Recession
While it’s tempting to try market-timing tactics when stock prices are low and falling, investors may be surprised that the best way to make money investing in a recession involves many of the same tactics when the economy is growing.
The timeless, best practices for successful investing apply during a recession.
- Continue to dollar-cost average (DCA): Whether you’re contributing regularly to a 401(k), an IRA, or a regular brokerage account, it’s wise to continue these contributions, especially during a recession. The idea of dollar-cost averaging, especially with stocks, is that you are generally buying shares at higher prices when the economy is strong and at lower prices during a recession. As you buy lower, you are averaging the price lower, which may boost returns in the long run.
- Rebalance your portfolio: When you rebalance, you return your asset allocation to its original targets. For example, if your target allocation is 60% stocks and 40% bonds, it’s likely that your stock allocation is lower and your bond allocation is higher during a recession. When you rebalance your portfolio in this scenario, you will sell bonds and buy stocks to return to your target allocation.
- Keep a long-term perspective: If you’re investing in stocks or stock mutual funds, it’s likely you won’t need to make withdrawals from your investment account(s) for at least five years to 10 years. For this reason, you shouldn’t worry too much about short-term market fluctuations.
Don’t Abandon Your Investment Strategy During a Recession
Just because the economy is in the middle of a recession doesn’t mean you need to invest any differently than you do during an economic expansion. This wisdom applies to both long-term investors and short-term investors or retirees.
- Long-term investors: If you’re regularly contributing to a long-term investment account, such as a 401(k) or IRA, don’t stop contributing during a recession. Also, if you allocate most of your money to stocks, don’t “chase performance” and sell out of stocks—which may be falling in price—and buy into bonds, which may be rising in price. Stay the course.
- Short-term investors and retirees: Although you may be (understandably) uncomfortable with a bear market, don’t be tempted to sell your stocks or stock mutual funds at a loss. If you need income now, it would be ideal to have money in a combination of cash and bonds, from which you can draw money while you wait for stock prices to recover.
Be as Aggressive as Your Risk Tolerance Allows
For investors who want to take advantage of a market correction during a recession, it’s important not to get too aggressive and buy more stocks than you would during better economic conditions. For example, if your risk tolerance indicates that you are comfortable with a moderate asset allocation of 65% stocks and 35% bonds, it’s wise to maintain this target allocation, no matter what the market is doing.
Investing Before and During a Recession
Where many investors go wrong during a recession is that they forget or don’t understand how certain investment performance and the recession are related. For example, the stock market is a forward-looking mechanism and economic reports are backward-looking. For this reason, stock prices often fall months before a recession begins. It also means that stock prices often bounce back up before the recession is officially over.
Here’s how the primary investment assets often perform before and during a recession:
- Stocks: Prices for stocks typically fall before the recession begins and almost always before a recession is officially announced. If you’re trying to take advantage of low prices, you’ll likely benefit most by investing before the recession starts or during its early phase.
- Bonds: Prices for bonds are generally rising during a recession, as the Federal Reserve is stimulating the economy by lowering interest rates and purchasing Treasury bonds.
- Cash/deposit accounts: Since interest rates are falling from the Fed’s monetary policy during a recession, interest rates on deposit accounts, such as money markets and certificates of deposit, are generally falling as well. However, cash and FDIC-insured accounts are free from market risk, unlike bonds and stocks.
- Gold: Since investors see gold as a safe haven, the price of gold often rises as economic and market conditions worsen. As investors become more comfortable returning to stocks, they may sell out of their gold investments, which pulls gold prices back down.
Benefits and Risks of Investing in a Recession
While investors can make money investing during a recession, there are always associated risks involved, especially with stocks and stock mutual funds and ETFs.
Before and early in a recession, stock prices are often falling, which can make for a good buying opportunity. For investors who continue to dollar-cost average into their 401(k) plans, IRAs and other investment accounts, they also benefit from buying as stock prices fall.
Investors who attempt to time the market and buy when prices are low or beginning to recover can still face significant volatility, even after it seems the market has fully recovered. This is referred to as a bear market trap, where investors get too optimistic, only to see another fall in prices after the temporary rise.
The Bottom Line
Although certain investment securities have historically performed in similar ways during past recessions, it’s still difficult to accurately predict what these investments will do in the short term. For example, stock prices can fall dramatically for one month, then rise dramatically the next month, only to fall again a month later.
Since investors are not able to accurately predict what the stock market and economy will do in the short term, it’s wise to plan your investment strategy when times are good and stick to it through a down market.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.