The U.S. economy is officially in a recession, the National Bureau of Economic Research recently announced. Economists revealed that the recession actually began back in February, and nobody knows exactly how long it will last.
This can be concerning news for investors, and many Americans are worried about investing right now. In fact, approximately 4 in 10 U.S. adults say it's not the right time to invest in the stock market, according to a recent survey from Personal Capital.
While it can be nerve-wracking to invest during a market downturn, a recession is actually a prime investing opportunity. However, there is one major caveat to consider before you throw your money into the stock market.
The advantages of investing during a recession
Stocks tend to lose value during recessions, which results in lower stock prices. So by investing during a recession, you may feel as if you're simply throwing your money away.
However, lower stock prices also mean that the stock market is essentially on sale. Right now is a prime time to invest, because when stocks are discounted you can get more for your money. If you only invest when the economy is strong and stock prices are high, you're missing out on the opportunity to load up on stocks when they're on sale. In other words, if you want to buy low and sell high, right now is your best chance to buy low so you can sell high later.
Keep in mind that you likely won't make a profit anytime soon. Investing in the stock market is playing the long game, so don't expect to see massive investment gains in the near future. However, while the market may be volatile in the short-term, it has always bounced back from every recession it experienced. It could potentially take years before you start to see your investments flourish, but by investing as much as you can afford now, you'll reap the rewards later once the market fully recovers.
One thing to consider before you invest
Although recessions are a great time to invest in the stock market, there's one question to ask yourself: Can you realistically afford to invest?
Because it could take years for the market to recover from this recession, it's important to make sure you're only investing money you won't need anytime soon. If you invest everything you have right now and then need to withdraw some of your money a few months or years down the road, you could end up selling when stock prices are even lower -- thus losing money on your investments. In addition, withdrawing money from your 401(k) or traditional IRA before age 59-1/2 could result in income taxes and a 10% penalty fee.
With millions of Americans out of work as a result of the COVID-19 pandemic, money might be tight right now. If you're struggling just to pay the bills, it might be better to focus on your immediate financial needs before investing in the stock market. Similarly, if you're still working but don't have a robust emergency fund, focus on building that first just in case you lose your source of income. Ideally you should be able to leave your investments alone for several years (if not decades), so try your best to ensure you're only investing what you can afford.
Investing during a recession can be intimidating, and the truth is that things could get worse before they get better. But they will get better eventually, and by investing as much as you can now, you'll reap the financial rewards later.