The stock market has been shaky all year, and many investors are unnerved by all the volatility. There's also a chance that a recession could be on the horizon, which can make it even more intimidating to invest right now.
To be clear, we're not officially in a recession. While the economy has contracted over the last two quarters, the National Bureau of Economic Research -- which is the organization responsible for declaring a recession -- has not made the call just yet.
If you're concerned about how a potential recession may affect your investments, though, you're not alone. Although nobody knows for certain what will happen with the economy or the stock market, there's one risky move to avoid if at all possible.
The risks of selling your investments
When the stock market is turbulent, it's normal to want to do something to protect your investments. It can be tempting, then, to consider pulling your money out of the market to avoid the impact of volatility.
However, because the stock market is unpredictable, this strategy can be risky. And in some cases, it can cost you a lot of money.
Say, for example, you're worried that stock prices are going to fall in the near future, so you sell all your investments and pull your money out of the market. There's always a chance, though, that instead of falling, stock prices actually increase. In that case, you'll immediately miss out on those earnings.
Then, say you regret selling your investments, so you decide to reinvest in the market. But because stock prices have gone up, you're paying more for the exact same stocks you just sold. Now, not only have you missed out on potential gains, but you've also lost money by paying higher prices for your investments.
A safer way to protect your money
While it may sound odd, one of the best ways to protect your money during periods of volatility is to do nothing. Simply hold your investments, ride out the storm, and wait for the market to stabilize.
You won't technically lose any money unless you sell your stocks. Your portfolio could lose value in the short term if stock prices fall, but that's only temporary. Eventually, the market will rebound, and your portfolio should regain its value -- and you'll be right back where you started without losing anything.
To give your portfolio the best chance of recovering, there are a few other simple moves that can help:
- Double-check that you're properly diversified: A well-diversified portfolio should include at least 25 stocks from a variety of industries. This way, even if one or two of your stocks don't recover from a recession, it won't have a major impact on the rest of your portfolio.
- Only invest money you're willing to keep invested: Market downturns are one of the worst times to sell your investments, because stock prices are lower and you may end up selling at a loss. If you invest, then, be prepared to leave your money in the market for at least a few years.
- Choose the right stocks: Companies with solid business fundamentals (such as strong financials and a competitive advantage in their industry) are more likely to pull through tough economic times. The more of these stocks you have in your portfolio, the better your chances of pulling through a downturn.
Market slumps are challenging, and if we're headed toward a recession, it's normal to feel nervous about your investments. But with a long-term strategy and the right stocks, your money will be as safe as possible.