Should You Buy Stocks in an Economic Downturn? Experts Explain
Written by
Jordan Rosenfeld
Edited by
Gabrielle Olya
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
An economic downturn or recession begins when the economy experiences a significant decline in typical activity, such as employment, production, income and a few other signs, according to the National Bureau of Economic Research. These factors must persist beyond just a few months.
While nobody wants a recession, there could be one silver lining for people in a position to invest as stock prices often go down, too.
Experts explained whether you should buy stocks in an economic downturn.
Generally Speaking, Yes, You Should
In general, investing when the market is down is a great idea, according to Joe DiSanto, a financial advisor, fractional CFO and the founder of JoeDiSanto.com.
Investors look at the market with a long-term perspective, keeping historical performance in mind. Over the past 100 years, the market has consistently trended upward. That’s not to say a major event couldn’t derail it for a significant period, but even the most cataclysmic financial moments in recent history — the Great Recession in 2008, the COVID-19 crash, major corrections, even Black Monday in 1987 — were followed by recoveries.
Thus, “If you could go back in time and buy during those big downturns, especially a prolonged one like the 2008 real estate bust, where the market lost 60% of its value and didn’t fully recover for about three years, you’d come out way ahead,” he explained.
He exercises caution in buying when the market is at a peak or climbing rapidly. “People will argue that buying during those times is still valid, because the market trends upward over time, and they’re not wrong. But if you buy at the top, there’s a good chance a correction is coming — potentially 20%, 30%, even 40%.”
Look At These Types of Stocks
If an investor is concerned about a downturn in the market, and they plan to try and stock pick during this time, generally looking for the defensive stocks or sectors makes the most sense according to Brad Clark, investment advisor representative and founder of Solomon Financial.
“These are things that will be in demand regardless of the economy. Sectors such as healthcare, consumer goods, utilities, etc., may be wise choices,” he said.
Consider Dollar-Cost Averaging
Another way to approach investing is through dollar-cost averaging, which is “the practice of consistently investing … regardless of whether prices are up or down,” DiSanto said.
For example, if you put in $1,000 a month every month for five years, straight from your paycheck, sometimes you’re buying high, sometimes low, but overall you’re averaging out the cost.
This dollar-cost averaging strategy will almost always outperform waiting for the economy to get better, added Ryan A. Hughes, founder and portfolio manager at Bull Oak. “Remember, the stock market has a nasty habit of climbing the wall of worry,” he said.
If You Have a Lump Sum Available
While scraping up extra cash to invest in a downturn may not be likely for most people, if you happen to have come into a large lump sum, maybe through an inheritance or a tax refund, investing it in the market in a downturn is a better plan than investing it when the market is high, DiSanto pointed out.
“The reality is, a correction may be coming, and if your time horizon is shorter, say you’re later in life, you might not have enough time to recover from a downturn.”
Consider Your Risk Tolerance
All that said, the market does carry risk, especially around entry and exit timing, DiSanto said. A perfect example is the Great Recession, he explained. If you were nearing retirement in 2008, in your 60s or early 70s, and had all your money in the market, you saw your portfolio lose about 60% of its value. “Many people in that situation had to delay retirement. There wasn’t much they could do at that point.”
But you can mitigate that kind of risk by adjusting your asset allocation as you get older by incorporating more capital preservation into your portfolio as you approach retirement. The trade-off is that you’ll likely see lower returns. “As the saying goes, more risk, more reward.”
Don’t Obsess Over Your Portfolio
The best thing you can do in today’s environment is to stop looking at your portfolio, Hughes emphasized. Look at your brokerage statement quarterly, not monthly. “Delete the app on your phone and remove the bookmark on your browser. Try not to look at your portfolio so much and keep a longer-term perspective on the market and your goals.”
Don’t Invest Emotionally, Do Research
Another important key to investing in general is never to invest based on emotion, Clark said. “Investing should be based on sound advice or experience.”
Instead, he said, “Any investor that is attempting to buy individual stocks should be well-versed in what they are doing, whether it is a downturn or not. Age and time horizon, in my opinion, are not the biggest concerns. The biggest concern should be that buying an individual stock should be a very small percentage of one’s portfolio.”
Don’t Let Market Slips Worry You
Lastly, don’t let a slight market dip make you nervous, Clark insisted. “A typical market pullback, in a calendar year, is around 14%. As of now, the market is only down around 2% year-to-date. You are only nervous because the news is telling you to be nervous.”
More From GOBankingRates
