You Shouldn't Stop Investing Because of a Potential Recession
No, you shouldn't put your investments on hold because of recession fears.
If you've been following the news at all, you've probably heard that there are signs of an impending recession.
All this talk of doom and gloom can leave investors questioning whether they should stop putting their money into the market, and younger adults who haven't started investing yet may use a potential recession as an excuse to postpone it even more.
It's understandable why people would have this concern. No one wants to invest at the market's high point, only to see their portfolio crash a few weeks or months later. But waiting around can end up being a costly mistake.
Why you shouldn't try to time the market
If you're basing your investing decisions on the possibility of a recession, then your goal is to time the market. For most investors, this is a poor strategy, because it's extremely difficult to predict whether the market will rise or fall on a year-to-year basis.
Recent history gives us multiple examples of predicted recessions that never happened. There was talk of a recession in 2012. That didn't happen, and the S&P 500 almost doubled from 2012 to 2019. There were also recession predictions in 2015. Although the market had a dip that year, it quickly bounced back, and the S&P 500 went on to gain 38.65% from 2016 through 2018.
Had you decided to wait out either of these potential recessions, then:
- You would still be waiting.
- You would have missed out on average returns of over 10% per year.
What has proven to be true over the history of the U.S. stock market is that over the long term, it increases in value. There will be periods when it goes down, but over a span of decades, you can be reasonably confident that it will go up.
The problem with basing your investment decisions on recession fears is that you could miss the periods when the market has its biggest gains. On the other hand, if you get over your investing fears and stay the course, there are two likely outcomes:
- There's no recession, and your portfolio does well.
- There is a recession. Your portfolio takes a hit, but as long as you don't sell at a low, you wait it out until the market turns around.
Adjust your portfolio based on your age, not the market
The volatility of the stock market isn't something to worry about when you're building a nest egg for decades in the future, but it is an important consideration as you get closer to retirement age. You don't want your retirement fund to lose a large portion of its value right before you need to start using it. If you're within 10 years of retirement, you should gradually adjust your portfolio towards more conservative investments, such as bonds.
Another option is to use a target-date fund. With this type of mutual fund, you choose your retirement year, and the fund will invest your money in assets that fit your retirement timeline. That means it will pick a heavier ratio of stocks when you have decades until retirement, and then shift to lower-risk investments as you get closer to your target date.
How to handle your investments during a recession
Recessions are inevitable, so you have to be prepared for them when they do occur. The good news is that a recession can be one of the best times for investors, provided that you do two things:
- Hold your investments. Don't be one of the people who gets nervous from falling market prices and starts selling off their portfolio at a loss.
- Continue investing. You have an opportunity to buy at a low point and make big gains when the economy recovers.
While it's never fun to see your portfolio lose a chunk of its value, this is the perfect time to invest. See it as buying stocks at a discount.
Invest for the long haul
When you're hearing about how the economy is going to collapse at any moment, starting to wonder whether investing is a good idea is understandable.
There's always the possibility of a recession, but they're notoriously difficult to predict, and the experts in the news have been wrong about it plenty of times in the past. Considering it's a lot more harmful to your portfolio to miss out on big gains, you should keep investing regardless of economic worries.
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