Earlier this month, economists declared that the U.S. is officially in a recession, and believe it or not, that means it's a great time to invest. The reason? Stock values tend to drop during a recession, which means you have an opportunity to score some quality investments on the relative cheap (though to be clear, this recession is a little unusual in that stocks are holding strong despite high levels of unemployment and general economic uncertainty).
Still, it's natural to be nervous about the idea of investing during a recession, especially if you're pretty new to buying stocks. If that's the case, here are a few moves that could help you avoid serious losses as you navigate these unusual times.
1. Have a fully loaded emergency fund first
When you buy stocks during a recession, the last thing you want is to have to liquidate them at a loss when a need for money arises. As such, you must make sure to have a healthy emergency fund before you invest. To really be recession-ready, that emergency fund should have enough money to cover about six months' worth of essential living expenses. If you're not there yet, boost your savings and then start investing so you won't get stuck in a position where you risk locking in losses.
During a recession, stocks can underperform on a whole -- but some market segments could take a harder hit than others. Think about the circumstances of our current recession. It's clear that because of COVID-19, travel stocks may have a harder recovery than other segments, and so you'd be really out of luck if they were to comprise 75% of your portfolio. In fact, diversification is a crucial step on the road to avoiding losses, so as you buy stocks, make sure you're targeting different segments. Another option? Buy some S&P 500 index funds. That way, you get a mix of stocks that automatically makes for a diverse portfolio.
3. Focus on essential goods and services
While all stocks have the potential to take a beating during a recession, certain essential goods and services are somewhat recession-proof -- meaning, people may be cutting back on clothing purchases and electronics, but everyone needs food, electricity, and water to live. As such, it could pay to add food, utility, and energy stocks to your portfolio. Chances are, those stocks will move with the general market, but they're less likely to fall victim to a lack of consumption.
4. Load up on dividend stocks
Dividend stocks are a valuable asset to hold during a recession. First, they can serve as an income source at a time when money might eventually prove to be tight. Secondly, stocks that pay dividends are often able to keep doing so even when their share prices decline, which could help offset other losses you might see in your portfolio. And remember, dividends can always be reinvested so you can grow your wealth even more.
If you've been on the fence about investing, now may be the perfect time to dive in -- despite the fact that a recession is upon us. Adopt the right strategy, and you'll be more likely to make money than lose money.