A recession can happen. Should we still invest? | Smart Change: Personal Finances
New economic data shows that GDP has shrunk for two consecutive quarters, meaning the US economy has contracted in the first half of 2022.
This is commonly referred to as a technical recession, although we are not officially in a recession at this time. The National Bureau of Economic Research, which includes the economists tasked with reporting whether the country is in recession, has yet to issue a formal appeal – although it could come.
All of this uncertainty can be alarming for investors and it can be difficult to decide what to do with your money. Is it really safe to invest right now? Or should you abstain? There are a few things to consider.
When to wait
Investing in a downturn can be difficult, especially if you’re struggling financially. If you don’t have any emergency savings, it might be wise to focus on that goal before investing in the stock market.
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Economic downturns are among the worst times to sell your investments. If you buy now and the market crashes, your portfolio will lose value. Then, if you face an unexpected expense or lose your job and realize you need the money, you may be forced to sell your investments at a discount and lock in your losses.
Before investing, make sure you have at least a few months of savings in an emergency fund. This way, it will be much easier to leave your investments alone and avoid withdrawing your money at the worst possible time.
Also, if you’re investing for a short-term goal, it might be best to hold off for now. For example, if you’re investing money that you plan to use for a down payment on a house in the next few months, it could be risky. If the market falls before this date, you will either have to postpone your target or sell your investments at a reduced price.
Why it pays to keep investing
It may seem counterintuitive to continue investing when the stock market is down and the economy is nearing a recession. After all, if a steeper decline is in the offing, investing now might seem risky.
However, downturns are actually some of the best times to invest because stock prices are significantly lower. By continuing to invest, you can buy quality stocks at a fraction of the price. Currently, some stocks have seen their prices drop by 20%, 30%, 40% or more, giving you the opportunity to buy at a steep discount.
The caveat, however, is that it could take time for your investments to rebound. No one knows how long this economic downturn will last, so if you choose to buy, make sure you’re prepared to hold onto your investments for at least a few years.
Although it’s a long wait, the payoff could be huge. By investing when prices are at their lowest, you can see substantial returns when the market inevitably rebounds.
Recessions can be discouraging, but they are normal. When you have a strategy in place, you can ensure that you are as prepared as possible no matter what happens with the economy.
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