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15 Things to Remember When Investing During a Recession

By Rachel Warren - Jul 19, 2022 at 5:39PM
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15 Things to Remember When Investing During a Recession

The bumpy ride may not be over yet, but there's still plenty you can do

Whether or not we might be on the cusp of a recession continues to be a matter of heated debate between economists and financial experts. With a bevy of headlines foretelling an imminent recession, while others make equally eye-catching predictions that lead to the opposite conclusion, it's often hard to know where the prognostication ends and reality begins.

While many of the hallmarks that may precede a recession have occurred in recent months, others have yet to make an appearance. No one can predict the future, but you can ready yourself for it.

Whether you're a brand-new investor or have years of experience, getting your portfolio ready for the next recession -- whenever that might be -- is of paramount importance. Here are 15 things you need to remember when investing during a recession.

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1. Don't let your money set idle

Failing to take action so your money makes money for you is one of the worst things you can do during a recessionary period. Of course, you want to have cash set aside for a rainy day, as well as be adding to your nest egg. And to invest in the stock market, you shouldn't be dipping into cash that you're going to need soon.

But even some seemingly simple money moves can make a difference. For example, in a rising interest rate environment, even as inflation remains high, putting your savings in a high-yield account can help you ensure your money isn't sitting idle and losing value.

In addition, if you have capital that you feel comfortable investing and leaving alone for at least three to five years, a recession usually presents a welcome opportunity to buy shares of great companies on sale.

ALSO READ: 3 REITs That Could Help Weather the Storm of Inflation

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2. Keep diversifying your investments

Portfolio diversification is vital in any market environment. If you're worried about how your portfolio might perform in the next recession, now is the ideal time to review your holdings and your thesis on each of the investments that you own and address any weak areas.

Whether this involves investing capital in some more traditionally stable companies like blue chip stocks, trimming your positions in stocks in which you have a less robust thesis (or where the thesis has changed), rebalancing your portfolio to ensure you're not overly concentrating in one holding or sector, or all of the above, having an asset allocation that fits with your personal risk tolerance is key to weather the turbulence of a recession.

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3. Don't ignore debt

Debt can weigh down every area of your life, whether it be your ability to save, invest, or reach any other of your financial goals. Now is the time to address any outstanding debt that you have, separate the "good debt"(such as a mortgage) from the "bad debt" (for example, high-interest credit card debt), and work out a personal repayment plan that you can reasonably achieve based on your current outlay and income.

ALSO READ: Retiring Under a Mountain of Debt? Here's What You Can Do

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4. Focus on the underlying business of the stocks you own

Researching and thoroughly understanding the underlying business of any company you invest in is crucial regardless of whether we are in a recession or not. And during a recessionary period, the value of knowing a business inside and out and staying current with events that will impact your investment (e.g., earnings, leadership changes, industry news) become even more apparent.

If the businesses that you own remain solid, there's no reason to give up the ship just because the stock price is down. On the flip side, if the underlying business has changed, even if the stock price is going up, it may be time to reevaluate that investment.

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5. Look at value-oriented stocks to anchor your portfolio

It's no secret that value stocks tend to trail the market's performance during bull markets, while during periods of correction or downturn, the same companies are often characterized by continued outperformance. In any market, these companies -- which are often household names that provide the products and services that people depend on daily -- can lend stability and steady growth to your portfolio that can maximize your returns over a period of years and help you weather downturns well.

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6. Invest in companies from recession-resilient sectors

Companies in noncyclical sectors -- such as healthcare and consumer staples -- often tend to perform relatively well against the broader market and other sectors during a recessionary period that's depressing stock prices.

The reasoning here isn't complicated. For example, people still need their medicines, regardless of what's happening in the stock market or the economy. This can give companies that operate in areas like the pharmaceutical sector, for example, an advantage and the ability to generate more favorable growth even when the rest of the market is down.

ALSO READ: 3 Healthcare Stocks That Could Help Set You Up for Life

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7. Tried-and-true stocks might grow slower, but can balance out more volatile investments

When it comes to investing in large and established companies, it's important to understand that these stocks tend to be at a far more advanced stage of their growth story than a newer, potentially higher-risk company in the same sector that has the potential to deliver higher rates of growth. These stocks likely won't generate lightning-fast growth, but the consistency can help to reduce the impact of market headwinds on your portfolio during down periods.

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8. Don't sacrifice your rainy day fund

You're not alone if you see an abundance of opportunities in the stock market during down periods and want to take full advantage of companies you love trading on sale. That being said, if recent life events or outside factors such as the current state of inflation have inhibited your ability to build and maintain a robust rainy day fund, the last thing you should forsake is your savings goal in order to invest.

Ideally, you can set aside money to both save and invest each month. But if it comes down to a choice of dipping into or skimping on your rainy day fund versus investing, it may be wise to take a step back and ensure the former is in a more stable place before you add to your portfolio.

ALSO READ: New Bill Would Help Employees Build Emergency Savings

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9. Don't buy or sell stocks based on headlines

If you follow the news, you've likely seen no shortage of eye-catching (and sometimes, fear-inducing) articles with gripping headlines about one or more companies that you own in your portfolio. And during turbulent or recessionary periods, fear and panic can rip through retail investors like wildfire.

While these compelling headlines may indeed precede valuable information about companies that you own, buying and selling stocks based on headlines alone is a recipe for disaster, and it's one of the easiest ways to sabotage your portfolio goals.

Rather than giving into reactionary investing, look beyond the headlines. Do your own research about the business to see whether or not these recent developments might impact the underlying thesis that led you to buy the stock in the first place before you make a move. Sometimes, a closer look at the story behind the article reveals a disproportionate reaction by the market that can present a prime opportunity for shrewd investors.

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10. Do your own research

As always, it's vital to do your research before you invest in any company, regardless of whether it operates in a cyclical or noncyclical sector, and invest according to your personal financial goals and risk tolerance.

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11. Evaluate your short- and long-term goals

Whether you're saving for college, a house, retirement, or anything else, the potential of a recession presents a prime opportunity to evaluate your current financial situation, where your goals fit in, and what you might need to adjust in order to reach those objectives.

Be it reevaluating your budget, working out a more aggressive debt repayment plan, or otherwise, taking action now to assess the state of your finances and see where adjustments might need to be made can help you ensure you stay on track in moving toward your near-term as well as long-term goals.

ALSO READ: Here's How to Get Started in Real Estate Investing on a $50,000 Salary

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12. Don't invest in fads

There is certainly no shortage of get-rich-quick schemes vying for investors' attention. And in the age when speculative investing seems to be in hyperdrive, it can be difficult to discern the quality investments from the ones that lack any real impetus for future growth.

Whether it's a sector that you want to invest in, a particular trend, or a specific company, take the time to understand where you're investing your hard-earned cash. If you can't formulate a solid thesis to justify the investment as a long-term addition to your portfolio, you might be better served looking elsewhere.

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13. Don't count out dividend stocks

Companies with a solid history of paying and boosting their dividends in a variety of environments can serve as a welcome source of safety for your money when investing both during and outside of a recession. Dividend-paying stocks can not only increase your total return on the investment but also gradually provide you with more cash that you can easily reinvest in more great companies.

ALSO READ: 3 of the Safest Ultra-High-Yield Dividend Stocks on the Planet

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14. Invest consistently and gradually

If we do enter a recession and the market experiences further turbulence, there's no need to rush to take action. In fact, there are any number of reasons why doing absolutely nothing with your portfolio may be a wise solution for a time, whether due to the fact that emotions are high, you lack sufficient cash to invest, or you simply don't want to touch your present holdings.

That being said, consistency with your investing habits wins every time against speculation or any attempt to time the market. Whether it's investing $100, $500, $1,000, or any amount that you are able invest in quality stocks on a regular basis, faithfully allocating cash toward your portfolio is how you build a basket of holdings that stands the test of time.

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15. A market crash could happen, but it won't last

As an investor, one of the biggest fears you might have about a potential recession is the impact it could have on the stock market as a whole, as well as your specific holdings. While it's true that a market crash could occur in line with a recession, a look at the broader market and its history provides some important perspective.

There's no denying the pain of feeling your stocks plummet, and the panic and uncertainty that often follow a crash.

Unfortunately, getting out of the stock market simply because prices are down isn't a solution and is actually the way you turn these declines into realized losses. The market has shown its ability to weather downturns and rise back to the top time and time again.

5 Stocks Under $49
Presented by Motley Fool Stock Advisor
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by The Motley Fool. I’d be sitting on a gold mine!" It's true, but we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Click here to learn how you can grab a copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

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Don't let a recession derail your personal finance goals

As a long-term investor, time is on your side, if you have the patience to wait out the storms of the market. This doesn't mean you hold onto fundamentally bad investments. If leadership has taken a business in a direction that you don't align with or the stock is going down because of one or more reasons tied to the specific business, you may need to evaluate that investment.

What it does mean is being willing to weather tough times in the market in order to enjoy the great ones. Often, most growth in investors' portfolios occurs during a few specific days of the year. And since one can't accurately guess when those days will be, let the law of compound returns do the work for you.

The Motley Fool has a disclosure policy.

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