Warren Buffett famously observed that it’s best to be “fearful when others are greedy and greedy when others are fearful” when it comes to the stock market. And, as the likelihood of an economic downturn in the relatively near future seems to be growing, plenty of people might be wondering if they should be taking advantage of the recent decline in stocks by investing during a recession. After all, it’s a lot easier to “buy low” when the whole market is down.
However, while a recession and the stock market declines that should correspond with it do create a great opportunity to get a cheap price on stocks, opting to take advantage of those low prices can backfire if the rest of your finances aren’t in order.
So, here’s a look at when it might — or might not — be a good idea to invest during a recession.
You Can’t Time the Market, And You’ll Probably Lose Money Trying
When you’re looking at the fluctuations of the stock markets, you’ll notice there’s a repeating cycle of long rises followed by a sharp decline and then recovery. That has led plenty of people over the years to look at historic charts of the S&P 500 and believe that if only they could sell stocks before they took a nose dive and buy back in when they start to recover, they’d make a fortune.
While it’s definitely true that if you really could anticipate all of the peaks and valleys before they happened, this would be a very lucrative strategy, but, unfortunately, you can’t. No one can, really. Timing the market has, over time, proven to be all but impossible for even the most experienced and informed money managers, let alone rookie investors. Nor is it going to really produce the desired results unless you really can time things perfectly.
Even if your market predictions were only correct some of the time, you’d probably have great returns, right? Once again, think again.
Time in the Market Beats Timing the Market
Data journalism website FiveThirtyEight ran a study to compare the returns on $1,000 invested in an S&P 500 index fund under two strategies: one where you would simply buy and hold and another where you would sell any time losses in a single week reached 5 percent, then buy back in once the market rebounded 3 percent from its bottom point. The end result was that the buy and hold investor turned $1,000 into $18,635 over a roughly 35-year period starting in 1980 compared to just $10,613 for the investor trying to time their entrances and exits.
And while some might make the argument that trying to shift your portfolio toward more “recession-proof” stocks or investments is a good strategy, you’re still facing the same issue. If you could anticipate the timing of economic cycles, it would definitely be worth it to shift into bonds or more defensive stocks and out of more cyclical stocks ahead of a recession. But, short of having a crystal ball, it’s next to impossible to possess the necessary foresight to earn significant returns by attempting to predict how the market will behave.
This would all point to the reality that stocks tend to add value over the long term, but they swing back and forth pretty unpredictably in the short term. The safest strategy is simply to buy in when you have money to invest and hold on over time regardless of the broader economic climate.
Time Yourself, Not the Markets, When Making Recession Investments
However, while trying to time the markets is inadvisable, generally speaking, working to time your own personal financial situation is absolutely essential. And that can be especially true in the case of a recession when a slowing economy can often mean cutbacks, layoffs and other events that can rock a family’s finances.
Given that getting the most out of your stock investments requires holding onto them for a long period of time, it’s important not to be overly aggressive in committing your money as it could mean overextending yourself and being forced to sell.
Check Out: What is a Recession?
Protect Yourself, Your Family and Your Bottom Line First
If you make a big investment thinking it’s a bargain because of a recession only to get laid off a month or two later as your company struggles to deal with the downturn, you might have to sell off those stocks to cover your short-term expenses. And if the markets fell another 10 percent in that same time period — a distinct possibility in a bear market driven by a recession — you could be faced with choosing between eating that loss or missing mortgage payments or running up credit card debt to feed your family.
This is why so many personal finance experts emphasize the importance of maintaining an emergency fund. As important as it is to invest and grow your money, you also want to be sure that you have enough cash readily available to cover the sort of major expenses that can pop up without warning.
Invest on Your Timeline, Not the Economy’s
Ultimately, it is true that a recession is probably the best time to buy stocks in a very general sense. Prices are likely to be relatively low, historically speaking, so you’ll capture more of the gains when things eventually recover. However, there’s a lot of other factors going into decisions about investing that are much more important, including whether or not your finances are in a position to allow you to sustain the investment for long enough to ride out the natural market cycles.
If you are in a stable job with an emergency fund and some extra money in your savings account, you might be in a situation where trying to take advantage of down markets brought on by a recession makes a lot of sense. But, if you have a stable job, an emergency fund and extra money in savings, it’s probably a good idea to invest your surplus in stocks even when markets are booming.
It is a nice bonus if the right time for you to invest happens to line up with a low point for the stock market, but it’s probably not worth trying to build your investment strategy around.
A recession appears to be in the cards, but it’s not an absolute, either. Find out what experts think about a possible upcoming recession.
More on Investing
- Afraid of a Recession? Get One of These 12 Jobs
- 5 Good Investments to Make This Year
- 9 Best Short-Term Investment Options
- Watch: We Know Warren Buffett’s Investing Secret, Do You?
We make money easy. Get weekly email updates, including expert advice to help you Live Richer™.