8 Ways to Keep Investing During a Recession

Rebecca Lake

A recession isn't the time to bail out on the markets.

Recessions can make investors nervous, and you may be wondering whether your portfolio needs some tweaking. While it may be tempting to abandon stocks when the market gets volatile, you shouldn't give up on investing during a recession altogether. "The rich get richer because they have thick skin," says Fred Creutzer, president of Creutzer Financial Services in Baltimore. "When the stock market takes a major hit, they stick with it and actually increase their investments by buying more shares, not taking money out." Figuring out how to invest in a recession comes down to maximizing returns while minimizing risk in ways that you're comfortable with. While you're waiting for the light at the end of the recession tunnel to appear, here are eight ways to stay the investing course.

Check your personal timeline.

Recessions don't come with a set end date. Deciding how to invest during a recession can hinge largely on your time horizon for staying in the market, says Jeff Barnard, president of Barnard Financial Group in Roswell, Georgia. "Holding onto quality positions can enhance any plan," he says. Whether that makes sense can depend on how close you are to retirement. But don't be quick to gamble with your investments. "Staying mindful of your long-term goals is essential," Barnard says. For instance, there's speculation that the current recession could trigger a V-shaped recovery, which may prompt some investors to go beyond their normal limits for risk tolerance. But that could backfire if the economy takes longer to bounce back.

Review your plan and stick to it.

Having a plan is essential when investing during a recession, but don't toss it out the window when things get rough. "A good plan takes recessions into account," says John F. Brown, consulting advisor at Exencial Wealth Advisors. He likens investing in a recession to flying. "If the weather gets bumpy, you don't open the door and parachute out," Brown says. "You simply ride out the bumps and trust your pilot and airplane to get you there safely." Rather than pulling back from 401(k) or IRA contributions, for example, you should be thinking about how you can leverage opportunities to purchase stocks at a discount if the market dips. Above all, Brown says, keep calm when everyone else is panicking.

Find the right balance.

Bonds or cash can offer safety when investing during a recession if you're uncertain about stock movements. But playing it too safe in a recession can work against you. "When you're too conservative with your purchasing dollars, you're not taking advantage of the dips in the market," Creutzer says. He suggests using balanced mutual funds that include a mix of both stocks and bonds as a way to invest strategically during a recession. For example, you might choose a fund that includes dividend-paying stocks with investment-grade corporate bonds. When comparing balanced funds, pay attention to the underlying holdings and how they reflect your risk tolerance. And of course, check the expense ratio against fund performance.

Check the fundamentals.

When approaching how to invest in a recession, equities still belong in the picture. But it's important to make sure the companies you're investing in are built to endure through a recession and beyond. "In a recession, an investor should allocate their portfolio to quality," says Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan. That means choosing well-managed companies that have solid fundamentals such as low debt loads, consistent cash flow and sales and strong balance sheets overall. Milan says dividend-paying growth stocks could be a good fit, as historically, they've outperformed in recessionary markets. At the same time, remember to review asset allocation periodically and rebalance when needed to keep your portfolio on track.

Don't get tripped up by bias or emotions.

Cognitive biases can skew decision-making at any time but especially during a recession. For example, recency bias encourages short-term thinking while confirmation bias can lead investors to only seek out information that validates their beliefs. Emotions can also be dangerous, says Luke Lloyd, wealth advisor and investment strategist at Strategic Wealth Partners. "Too many people base their decisions off emotion like fear and greed and, frankly, it gets them into trouble," he says. Avoiding emotional or bias-driven traps when investing during a recession all goes back to acknowledging how those things can negatively affect you and having a plan. "If you have a strong, solid plan in place almost everything else should take care of itself," Lloyd says.

Aim for consistency.

A recession could be a prime opportunity to start investing if you haven't yet, and the younger you are, the better. "It's much more important for long-term investors to have time in the market versus timing the market," says Mike Mussio, president at FBB Capital Partners in Bethesda, Maryland. Taking advantage of dollar-cost averaging can help you reap the benefits of buying in when stocks are low. But don't assume you have to pour buckets of money into the markets to make investing in a recession worth your while. Instead, pick a set dollar amount you can realistically invest regularly and stick with it. "Using this approach will help you keep discipline through the volatility," Mussio says.

Use past recessions as a guide.

One of the most important things to understand about investing during a recession is that it's something you'll likely have to do more than once. "Recessions are common, and on average, they happen every four years," says Luis Strohmeier, partner and wealth advisor at Octavia Wealth Advisors in Los Angeles. The silver lining is that past recessions can teach you how to react to future ones. "Understanding how certain industries behave during different economic cycles is paramount to designing and executing a portfolio that can weather any economic cycle," Strohmeier says. That doesn't mean you'll be completely insulated against losses during a recession, but it can help you build a portfolio that's better equipped to sustain them.

Don't assume you have to go it alone.

During a recession, it can be helpful to get advice from experts who understand the ins and outs of investing when the economy shrinks. "Take the time to talk through your investment allocation with a financial professional," says Michaela McDonald, financial advice expert at Albert. When discussing your strategy for investing during a recession, consider where you are financially in terms of your age, income and lifestyle. For example, how you invest in a recession as a 40-something might be quite different from the way your 60-something neighbor approaches it. Talking with a financial advisor can help you determine whether your current plan is working and how to improve it if it's not. "Your future self will thank you," McDonald says.

Eight ways to keep investing in a recession

-- Check your personal timeline.

-- Review your plan and stick to it.

-- Find the right balance.

-- Check the fundamentals.

-- Don't get tripped up by bias or emotions.

-- Aim for consistency.

-- Don't assume you have to go it alone.

-- Use past recessions as a guide.

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