An impending recession is the worst nightmare of a lot of investors. But honestly, I'm not too worried about it. That doesn't mean I like losing money -- far from it. But I feel confident in my investing strategy, and I trust it can carry me through. Here's why.
Ups and downs are a natural part of investing
Even the most profitable stocks have had their ups and downs over the years. Most of the time, they eventually rebound. But this can take months or even years.
It's tempting to try to sell quickly when you see share prices plummeting to prevent further losses. But often, this just turns a temporary loss into a permanent one. Had you just held on to the stock and waited for the share price to come back up, you could've regained all you lost and then some.
Often, the best thing to do in these situations is nothing. Trust that you've invested well, and give your portfolio the time it needs to recover. This isn't too difficult for me because most of my savings is invested in retirement accounts I can't easily access until I turn 59 1/2. Since I don't plan to spend that money for a while, daily or even monthly price fluctuations don't bother me as much.
What I'm doing to prepare for a potential recession
Keeping a long-term focus is definitely an important aspect of my investing strategy. As part of that, I don't invest my emergency fund or money I expect to use in the next five years or so. This way, I won't be forced to sell off my investments at an inopportune time just because I have to pay a bill.
I also do my best to keep my investments diversified, rather than sinking all my money into a couple of stocks. This won't prevent me from losing money in a recession, but it can help make the loss less painful.
When all your money is in a single stock, you need it to do well in order to make a profit. But if you have 100 stocks, one or two doing poorly won't affect you as much. Chances are, you'll have a few others that are doing well at the same time.
Index funds are a simple way for investors of all skill levels to diversify their savings with a single purchase. These give you part ownership in hundreds of companies, and they're also one of the most affordable investments around. Keeping your costs down is smart, especially when preparing for a recession, because then you won't have to worry about being gouged by fees and losing money on your investments at the same time.
You have to decide what's right for you
It's pretty easy for me to be calm about my investments when I don't plan to spend the money anytime soon. If I were on the brink of retirement, I might feel a little differently. In that case, I might move more of my money into safer investments, like bonds. But even then, I wouldn't pull all my savings out of stocks. The earning potential is just too great to ignore, even with the risk of loss.
Ultimately, when it's your money, what you do with it is your decision. But I suggest you make a plan now. Taking steps to diversify your savings and anticipate how you'll handle a recession will give you more confidence when you have to face one.