Why Invest During a Recession?
Unless you have been living under a rock, you know that 2020 has not been kind to the stock market. We have seen an 11-year bull market come to an end. Bear markets are a natural part of market cycles. Not only can you survive them, but you can position yourself to benefit from them.
While many investors are losing confidence in their investments, others find this as an opportunity to be buying new assets. If you are wondering if now is a good time to invest, start by taking these considerations into account. If you are still interested, get in touch with your investment advisor to review your options.
1. Emergency Fund?
With the uncertainty from this global pandemic, many people are preparing for the worst – job loss, medical bills, or even unexpected loss of a loved one. We are still in the early stages of this crisis and the long-term impacts are unknown.
Even if you are certain you job is secure and stable, I would still be cautious. The U.S. unemployment rate jumped to 14.7 percent in April and has not shown signs of recovery yet. If we look back at the 2007-2009 recession, unemployment did not peak until October 2009. By that time, the market had railed 56% from the March 2009 bottom. The stock market is forward looking, and future expectations will be priced in today.
A general rule of thumb is to have three to six months of expenses saved in a savings account as an emergency fund. It ranges depending on your situation because some jobs may be more secure than others. Once you have this taken care of, then you can turn your focus to investments.
2. Pay off Debt
If you have debt with a high interest rate pay it off before investing! There is no guarantee when it comes to investing. I recommend paying any debt with interest rate above 5% before investing. The only type of investing I would do while having high interest debt is contributing enough to get your 401K match.
Average Interest Rates for Debt:
3. Prepare for Volatility
If you choose to invest during the market downturn, there is always potential for the market to go lower. Even the best investors do not know when the market will ultimately bottom. Many people remember Warren Buffet famously said “Buy American. I am”. He said this October 2008 six months before the market bottomed.
Below shows how the market has performed this year:
The point is do not focus on trying to time the perfect bottom because it is impossible. Focus on figuring out your time horizon and risk tolerance. For example, if you need money from your portfolio short term be conservative and if you have a long-term horizon you can afford to take on some risk.
4. What is your Strategy?
This is a time you will want to be precise and logical about your next investment decision. Do not just go in and buy the stocks with biggest drops in price hoping they will rebound. There are going to be a handful of stocks with enormous gains in some of the most beaten down sectors from this crisis. There will also be stocks that never recover or worse go to zero.
Below shows how Citigroup and AIG have performed since the 2008. These are not the only companies that have not recovered.
Before investing, you will want to work with your advisor to make sure you have a strategy is place. Together, you can be sure that the changes support your long-term financial goals.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy ensures success or protects against loss. Data source for AIG, Citigroup, and S&P 500 index chart: YCharts.
