The COVID-19 crisis has done a number on the U.S. economy, and we're now in a recession that could easily last well into 2021. In light of that, you might assume that now's a terrible time to invest, when actually, the opposite is true.
Stock values have the potential to fall during a recession (though thus far, they've largely held strong), and that means you get an opportunity to snatch up quality investments at a discount. But if you're going to invest in the coming months, be sure to have good answers to these questions first.
1. Do I have a fully loaded emergency fund?
If you liquidate investments when they're down, you're guaranteed to lose money -- there's no way around it. The key, therefore, is to make sure you have the ability to cover your living expenses without resorting to selling stocks. And an emergency fund is your ticket in that regard.
Under normal circumstances, you should aim for three to six months' worth of living expenses in the bank. For a recession, six months is better, and if your income is variable, you may even want to aim beyond that point. If you don't have emergency savings, you'll risk having to sell your investments at what could be a terrible time, so don't add to your portfolio until you're set with a good six months' worth of cash.
2. Do I have a specific strategy?
Investing during a recession is a good idea, provided you don't just dive in blindly. Rather, put some thought into how you'll go about it. Will you aim for a diverse mix of stocks? If so, index funds are a good bet because they simply track market indexes that already exist, and as a bonus, they take a lot of the research and guesswork out of investing.
On the other hand, you may decide to specifically target stocks that are likely to be recession-proof. For example, food spending is likely to mostly hold steady even as people grapple with income loss, so that's one segment to look at. Similarly, people still need water and electricity during a recession, so you can see about adding utility stocks to your portfolio. There's no single correct strategy to employ at a time like this, but you should map out some sort of plan.
3. What happens if my portfolio value plummets in the coming months?
We just reviewed the fact that an emergency fund can spare you financial losses if your stock investments tank in the course of a recession. But that doesn't address the mental or emotional implications of seeing huge losses on paper or on a screen.
Before you invest during a period that could very well be loaded with volatility, ask yourself if you're equipped to handle those wild swings and have the capacity to sit back and let your portfolio be when stock values decline. If you're an impulsive person by nature who's likely to panic during a downturn, then you may either want to invest minimally or otherwise turn your investing over to a financial advisor, who won't pull the trigger and sell off investments of yours the minute they decline.
There's no reason to steer clear of the stock market just because the economy is doing poorly. Quite the contrary -- now could actually be a pretty good time to invest. Just make sure you're equipped with cash reserves, a strategy, and the right mindset before moving forward.