The Right Strategy Is Critical When Investing During A Recession
2022.05.20 14:47
Investing during a recession can be a very difficult, and often dangerous, prospect. However, it can be done if approached with a bit of strategy and preparation. Follow these tips to avoid losing it all when a recession hits!
What Is A Recession?
Let’s start with the definition of what a recession is. According to the National Bureau of Economic Research (NBER), the agency responsible for dating recessions, a recession is a period of two, or more, consecutive quarters of negative economic growth. While the gets discussed in the financial media as if it is the in reality, it is a period of declining economic growth.
The chart below shows the historical length of recessions over time.
Historical Length Of Recessions
Notably, the risk to investors during an economic recession is high. Historically, markets tend to correct rather sharply during recessionary periods.
Historical Length Of Recessions and Market Declines
Such is because the markets reprice the excess valuations given to financial assets during the previous expansion. Higher valuations during expansions tend to precede deeper reversions during recessions.
SP500 ,Valuation, Median Price 24-Month
As is evident, recessions are coincident with market corrections and bear markets. The problem with trying to avoid a recession, from an investment perspective, is this: by the time a recession is evident, it is often too late.
A Day Late & A Dollar Short
The biggest risk of investing during a recession is putting a “recession investing strategy” into place at the right time. As I wrote in
Such is the biggest risk to investors. The chart shows the S&P 500 from 1960 to the present. Each of the blue dots is the peak of the market PRIOR to the onset of a recession. The yellow triangles are the official NBER recession announcements.
NBER Recession Dating Vs Market Realization
The issue to investors is evident. In 9 of 10 instances, the S&P 500 peaked and turned lower prior to the recognition of a recession.
The decline from the peak was considered as economic growth remained strong. Therefore, investors didn’t adjust their strategy to invest during a recession.
In reality, however, the market was signaling a coming recession in the months ahead. The economic data just didn’t reflect it as of yet.
The problem is in waiting for the data to catch up.
NBER Recession Dating Table
Today, we are once again seeing many of the same early warnings. If you have been paying attention to the trend of the economic data the stock market and the yield curve the warnings are becoming more pronounced.
How To Invest During A Recession
Investing during a recession can be dangerous particularly when valuations across all asset classes are elevated. However, if you choose to invest during a recession, there are some steps to take to make sure you are prepared to weather the increased market volatility.
- .
Once you are prepared, what investments do well in a recession?
That is very true, to make money in a recession focus on stocks that:
Investing during a recession is not easy due to high volatility, falling prices, and negative media headlines. However, given a well-thought-out strategy, a longer-term timeline, and an ability to stick to your discipline, it can be very profitable.
How To Avoid Losing Money In A Recession
As noted, the biggest problem of investing during a recession is knowing that you are in one. There are certainly many indicators suggesting we could indeed be heading into a recession sooner than later, but unfortunately, we won’t know for sure until after the fact.
Therefore, we must respond to market warnings and take action to prepare for a recession in advance. That said, the most important thing isn’t necessarily what actions to take, but what behaviors to avoid. During market downturns, it is our emotional and behavioral biases that tend to inflict the most damage to our financial outcomes.
is one of the leading factors influencing investment decisions according to a recent survey from the CFA Institute.
Psychological Factors On Investment Decisions
” –
Therefore, to avoid losing money in a recession you must:
I agree with Motley Fool’s conclusion:
Most importantly, you must know the difference between a company and one that isn’t.
Final Thoughts On How To Invest In A Recession Without Losing It All
There is a high risk of losing a lot of money in a recession if you aren’t strategic about how you invest. We hope that our points about tax-loss harvesting, staying the course, having adequate emergency cash, and avoiding emotional biases such as loss aversion, etc., have been useful.
If you decide not to go it alone, please consider setting up a meeting with one of our financial advisors. We are a wealth management firm in Houston serving clients across the country.
