For most of the last year, experts have been debating whether we'll face a recession, and if so, how bad it will be.
Even the Federal Reserve is leaning more toward expecting a downturn, with officials at the Federal Open Market Committee predicting a "mild recession" by the end of 2023. Volatility within the banking industry has contributed to these recession concerns, as several high-profile bank collapses have rattled consumers and investors alike.
If a recession is on the horizon, how should it affect your investing strategy? Or should it affect your strategy at all? Here's what you need to know.
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How to prepare for a recession
Recessions are daunting, even for seasoned investors. It can also be tempting to stop investing or even pull your money out of the market in an attempt to protect your portfolio. But you don't necessarily have to change your strategy to keep your savings safe.
Effectively timing the market is next to impossible, as stock prices can be unpredictable in the short term. If you stop investing or sell your stocks, there's always a chance that prices could surge -- and you'll have missed out on those gains.
At the same time, if you're holding off buying until prices drop, you'll miss out on valuable time to grow your portfolio. It's also impossible to know in the moment when the market has bottomed out, and if you wait too long, you may miss it.
Perhaps the best strategy, then, is to simply keep investing like normal through all the market's ups and downs. If a recession is coming, stock prices may fall -- but keep investing anyway. And even when things look bleak and you're tempted to pull your money out of the market, try your best to stay invested. You'll reap the rewards when the market rebounds.
For example, amid the dot-com meltdown in the early 2000s, Amazon saw its stock price plummet by a staggering 94% between 1999 and 2001. But in the following two years after it bottomed out, its price soared by more than 700%.
Of course, not all stocks will see Amazon-like growth. But when you stay invested during the tough times, you're more likely to see lucrative returns during the recovery period.
Two caveats to consider
In general, investing consistently through the downturns is one of the most effective ways to maximize your returns while keeping your money safer.
That said, it's wise to only invest right now if you can afford to leave your money in the market for the foreseeable future. Stock prices may have further to fall if we face a recession, and downturns are one of the worst times to sell your investments.
If you invest all your spare cash and then face an unexpected expense, you may have to pull your money out of the market after prices have dropped. As a result, you could be selling your investments for less than you paid for them, locking in your losses.
The other caveat to consider is that to ensure your investments rebound after a recession, you'll need to invest in the right stocks. Not all companies will be able to survive an economic downturn, but businesses with solid underlying fundamentals have the best chance. The more of these stocks you own, the better off you'll be.
Times like these aren't easy, but staying invested during the slumps is one of the best ways to take advantage of the next bull market -- whenever it may begin. With the right stocks and a long-term outlook, you could earn more than you may think during the market's recovery.
