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Should You Change Your Investment Strategy in a Recession?

By Taylor Carmichael, Jason Hall, and Danny Vena – Nov 1, 2021 at 6:00PM

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Do macro events change your investment strategy? A trio of Fool contributors discuss whether to buy stocks in a recession.

In this episode of "The 5," recorded on Oct. 11, Jason Hall, Taylor Carmichael, and Danny Vena discuss their investment strategies when the economy starts going backward. Do you buy the same sort of stock you always buy? Do you buy a different group of stocks? Or do you avoid the market altogether, and wait for a stronger economy?

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Jason Hall: How will you change, Taylor, your investing strategy when we do see an economic downturn?

Taylor Carmichael: That's an interesting question. In general, I don't change. Unlike you, Jason, I'm fully invested in the market, pretty much I'm 100% invested at all times. I hate having cash on the sidelines. I just can't stand it. It bugs me. I'm a shopper at heart, I like to buy things. The only way I'm able to save money is by tricking my brain into buying stocks. I like to buy things. In a bad market, I'm still buying stocks. I think of the stock market as honestly the best place to park your money. Just over anything. I am a big believer in the market for creating wealth. That doesn't change, I get a paycheck, I put some into the market. I do it all the time. I do it with every paycheck, I'm adding to the market. The difference would be the types of stocks that I buy. If there's some macro changes in the market and some of my stocks are getting killed and others are doing well. I play it by ear. Sometimes I'm adding to the ones that are getting killed if I think they're getting killed unfairly, but other times, I pick out the ones that I think are stronger in this environment. For instance, if you have a weak economy or a recession, if we're heading into a recession, then I would start thinking healthcare. I love healthcare stocks, I'm always buying healthcare stocks. But I would probably shy away from the biotechs that aren't profitable, they have a lot of debt and they're trying to move forward. Instead get somebody who is profitable and growing fast. I'd play it safe in that regard and just be a little choosy in regard to the stocks that I'm picking, but I'll definitely keep buying.

Hall: Yeah. I think that's the thing, that's the key. Your strategy is not changing so much as you're taking advantage of the opportunities the market is giving you. Taylor, that's very different for me, and I'll talk about it in a few minutes, is you manage your optimal situation by staying 100% invested. I keep a little bit of cash to manage my psychology this exact same way. I'll talk about that in a minute. Danny, I know this is something you've talked about before. You just blow everything up and completely go nuts when there's a little bit of a sell-off going on, right? Wait, no. No, you don't.

Danny Vena: Wait, no. Actually, I am boringly predictable. When there's a market sell-off, I keep buying when stocks are high, I keep buying when stocks are low, I keep buying during a recession, I keep buying during a bull market. Essentially, I'm a net buyer of stocks all the time. The reason that I do that is because, I never know when the next stock that I'm going to buy is going to be the next 10-bagger, or 50-bagger, or 100-bagger. I'm always looking for the next really great opportunity. The one thing that I might do a little bit more of is when I see the entire market is down, and I'm talking about February to March of last year when everything was down or late 2008, early 2009 when everything was down. I might take everything that I have spare cash and throw it at buying stocks because I know what happened in 2009, when I was buying stuff in January, and February, and March, just before the big market run-up. I had some stocks that turned into five-, six-, seven-baggers over less than a year timeframe because everything was beaten down so bad. That turned out to be the case last year, I inadvertently doubled down on my position in The Trade Desk (TTD 3.18%) on March 18 when the stock was at its lowest point and it ended up going up 700%. I know you've heard this before, but I never know when that's going to happen so I just have to keep buying stocks. It's not because I have this great crystal ball, it's because I keep buying into the highest conviction companies that I can own and eventually, even a blind squirrel will find a nut.

Hall: Danny you're a lot more than a blind squirrel. That's for sure. You're like a super squirrel with super glasses.[laughs] The key here is that Danny within nuance doing nothing, Taylor within nuance doing nothing is a plan. It's because you have a plan that's based on what the data has told us. The data has made it pretty clear that historically, Taylor, as you said, the stock market has proved a wonderful creator of wealth. It's a creator of wealth over the long term, we were talking about on the last show, we were talking about with one of the companies that she covered. The stock is up tremendously this year and it's trading at very, very high valuations, and it's right at a 52-week high. It's not so much about getting too caught up with the 52-week high or the 52-week low, but it's the next 520 weeks. How's the company getting to do over the next five, 10, 20 years? That's what we're buying to focus on.

I guess my answer to this is, just as Taylor said, he stays 100% invested because that's what works for him. From a psychological perspective he actually saves money by investing all the time and staying 100% invested and cash drives him crazy, for me. Having a small amount of cash for me, it's between 5 and 10% of the value of my portfolio. Not my emergency fund cash. Not my money to pay for my kids' day care for the next year cash. Not that real-life money, but percentage of just my investments, my portfolio, 5 to 10% cash. That's how I manage my own psychology because it gives me some money to act when I do see those opportunities, we see maybe the market is down. S&P 500 is down 10% in the past month. Let's just say that's the situation, it's down 10% in the past month. I probably own some stocks or there's some stocks on my watch list that are down 15 or 20% just because they've fallen more than the market. Not because the business is doing poorly, but just because the market has sold off on them more than it's sold off on other stocks. I have a little bit of cash now I can go buy those companies. Here's the thing. Sometimes they're down 20% over the past month and they've fallen more than the market. But they're still up 10, 20, 30, 40, 50% over the past year. You have to have that context; too much cash guess what you do, you end up with less money overtime because it loses spending value and there's the opportunity cost of leaving it in cash over long periods of time. I try to be thoughtful of that, that for me keeping a little bit of cash, do as Taylor said, if the market does turn, I can use that cash to buy my favorite companies that have fallen more than the market. That's how I think about it.

Taylor Carmichael owns shares of The Trade Desk. The Motley Fool owns shares of and recommends The Trade Desk. The Motley Fool has a disclosure policy.

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