Do’s and Don’ts of Investing in a Recession

Inflation is up, the stock market is down, and it looks like the U.S. will be entering a recession.

Facing an economic downturn sucks…but you don’t need to make it worse by making the money mistakes that a lot of people do during times like these.

I’m here to get you through it.

Today, I’m walking you through the worst money decisions you can make in a recession…AND how you can make strategic moves that will set yourself up for financial success in the future.

Before we dive into investing in a recession, let’s start with some basics.

What is a recession?

A recession is a significant, widespread, and prolonged downturn in economic activity. If that sounds vague…it kind of is. There are no defined boundaries or a specific formula for declaring a recession.

But a few indicators of a recession include:

• Slowdown in consumer spending
• Spikes in unemployment
• Slowing in manufacturing activity

The National Bureau of Economic Research, the governing body that officially declares recessions, evaluates three criteria in their recession definition:

1. Depth: looks at unemployment levels to measure how many workers are impacted by an economic downturn
2. Diffusion: looks at how many industries are affected by an economic downturn to measures how widespread the recession is
3. Duration: measures how long an economic downturn lasts before experiencing economic expansion.

So, your burning question….

Is it possible to make money in a recession?

There’s no simple answer to this question.

Realistically, if you’re already invested, you may lose money during a recession. But you can still make strategic money moves that will set you up for long-term financial success.

Let me tell you how…

Strategies for investing in a recession

First, let’s start with a few things NOT to do.

1. Don’t panic

A recession is normal; “boom” and “bust” are parts of the economic cycle.

Between 1960 and 2007, there were 122 recessions that affected 21 advanced economies roughly 10% of the time.

The recession will pass. In fact, since 1900, the average recession has lasted 15 months.

In the meantime, come to terms with the fact that your investments probably won’t be doing well right now. Let go of the expectation that you’ll be building wealth right now and trust that you’re setting yourself up for long-term financial success by not panicking.

2. Don’t sell your current investments

Recessions and drops in the market tend to go hand-in-hand. Seven of the last 11 bear markets either preceded or followed a recession. And when the market drops, people often pull money from their investments.

This is the biggest investing mistake people tend to make when the market drops. They panic and sell their investments at a loss.

We saw it during the 2008 recession. When the stock market dropped, people sold their investments.

That is the biggest investing mistake you can make. Historically, the stock market has always recovered.

If those people had just held onto their investments, they would have made huge returns on it instead of selling at a loss and having no chance of making their money back.

This is also why we talk about the importance of saving an emergency fund BEFORE you start investing. That way, you have your emergency fund to rely on if you lose your job and you don’t want to have to pull money out of your investments in order to cover your expenses.

3. Don’t try to time the market

Timing the market is extremely difficult…and very, very few people do it well enough to gain any sort of advantage in the market.

If you’re excited about the possibility of buying into the market when it’s at a low, I don’t recommend just holding onto your money and waiting to see how low the market gets. Instead, I’d recommend a strategy called dollar-cost averaging, which I’ll explain more in a minute.

Things you SHOULD do during a recession

1. Think of this as an opportunity

Prices are lower, so you can buy investments for cheaper. This is actually a golden opportunity to get into the market at a lower price point. If you’re sitting on extra cash on top of your emergency fund, now is a great time to get it invested.

2. Try dollar-cost averaging

Dollar-cost averaging is when you decide you’re going to invest a certain amount of money, regardless of what the market is doing.

For example, say you have $1,000 you want to invest. If you don’t feel comfortable with where the market is right now, then divide that $1,000 into 4. Every month for the next 4 months, invest $250…whether the market is up or down.

This is a solid investment strategy, because you’ll be consistently investing as the market drops.

Let’s say that the market drops for three months. Every month, the price of stocks will be lower than the previous month, which maximizes your return in the long-term.

This also helps you get over the fear of WHEN to invest. People who are trying to time the market constantly worry about whether now is the best time to invest or if they could get a better price next week or next month.

But by committing to a specific day every month you’re going to invest – say, the 10th of every month – you can free yourself from analysis paralysis and create a healthy, effortless rhythm of building wealth.

3. Invest in real estate

The passive income that comes from real estate investing is consistent, even during a recession. After all, it’s a necessity. No matter what is happening with the economy, people need a place to live. That means that real estate investments are less volatile and guaranteed to give you a profit.

If you can’t afford to buy a rental property or don’t want the hands-on stress of being a landlord, then consider investing in Real Estate Investment Trusts (REITs). These are companies that manage their own property portfolios and you can buy in for the cost of a share, instead of the cost of a down payment.

4. Look into I bonds

I bonds are a type of U.S. savings bond designed to protect the value of your cash from inflation.

The interest rate is partially determined by the rate of inflation, which changes every six months. Every May and November, the US Treasury Department evaluates the current state of inflation and sets the inflation rate based on the Consumer Price Index for all Urban Customers (CPI-U).

Basically, the higher inflation goes, the higher the rate of return on I bonds.

At the time of writing, the interest rate on I bonds is 6.89%. This will likely decrease as inflation slowly comes down, but I bonds still provide solid protection against inflation and are definitely an investment worth looking into, especially the next time inflation rises.

5. Put your money into CDs

A certificate of deposit (CD) is a low-risk savings tool that can boost the amount you earn in interest while keeping your money invested in a relatively safe way.

Like savings accounts, CDs are considered low risk because they are FDIC-insured up to $250,000. However, CDs generally allow your savings to grow at a faster rate than they would in a savings account.

By putting your money into a CD, you’re guaranteed to at least make a return of about 2%.

Keep in mind that when you put your money into a CD, it’s locked up for a set amount of time and you can’t get it out. That means it’s crucial to have an emergency fund in place before you do this, so that if you suddenly have an unexpected expense – like your water heater breaks down or you get laid off – you have money on hand to deal with the crisis.

How to navigate economic uncertainty

The thought of a recession is scary, but it doesn’t have to be a significant financial setback for you; in fact, you can use it to position yourself for financial success in the long-term.

If you want more free resources for successfully navigating economic uncertainty, subscribe to our newsletter! Every Friday, we send out advice for upleveling your finances and updates on what’s happening in the personal finance world.

‍