Recessions feel scary, but the plan doesn't change
When the news starts talking about a recession, our first instinct is usually to hide our cash under a mattress. Everything feels unstable, and watching portfolio balances drop hurts. But panicking and selling everything is usually the most expensive mistake we can make.
Instead of trying to time the bottom of the market, we stick to the basics. Recessions are a normal part of the economic cycle. Companies that make essential goods and services keep running. People still need to eat, use power, and buy medicine. When we invest during a downturn, we are essentially buying those resilient companies and assets on sale.
Shore up your cash before you invest
Before we put a single extra dollar into the market during a rocky economic patch, we need to make sure our baseline is secure. That means keeping our everyday money safe in reliable Banking & Savings accounts so we don't have to touch our investments if an emergency pops up.
While we are parking that cash, it helps to know what things actually pay. Look at the annual percentage yield (APY), which is simply the total yearly return on your savings including compound interest, to make sure your cash is working as hard as it can. And if you are carrying any high-interest debt, check the annual percentage rate (APR), the yearly cost of borrowing money including interest and standard fees, because paying off a high APR balance is often a better financial move than buying stocks in a shaky market.
Keep buying through Index funds and ETFs
Trying to pick individual stocks during a recession is like playing darts in the dark. We don't know which companies will bounce back fastest. That is why we rely on broad-market Index funds and ETFs, baskets of hundreds of stocks lumped together so we own a tiny piece of the whole economy instead of just one bet.
When you buy these through your standard Brokerage accounts, a regular place to buy and sell investments outside of retirement plans, you can automate your purchases. Set up a recurring transfer and buy a little bit every week or month. When the market dips, those automatic buys get you more shares for your money. It takes the emotion completely out of the process.
Use tax advantages to your advantage
If you are investing for the long haul, a downturn is actually a great time to lean into tax-advantaged accounts like Roth IRAs, special retirement accounts where your investments grow tax-free and withdrawals in retirement are also tax-free. Because share prices are lower during a recession, moving money into these accounts lets you lock in lower prices for the future.
For those who don't want to pick funds or deal with rebalancing while the market is bouncing around, hands-off options like Robo-advisors, automated investment platforms that build and manage a portfolio for you using computer algorithms based on your goals, can do the heavy lifting for a tiny fee. They automatically adjust your risk level without you having to look at your portfolio every day.
Protect the rest of your financial house
Investing isn't just about stocks and bonds. A real recession plan looks at your whole picture. If your job feels uncertain, make sure your Credit Cards aren't maxed out, your Mortgages or any other Loans are manageable, and your Insurance policies are up to date so a surprise medical bill or fender bender doesn't derail us.
The catch with investing during a recession is simple: you have to stomach the drops. If you sell when things are down, you lock in your losses. If you hold on and keep buying, you ride the recovery back up. Keep it boring, keep it automatic, and let time do the work.