Should You Invest During a Recession?

Investing during a recession can seem difficult, but a strong plan can make all the difference. Here we discuss the risks and benefits of recession investing, tips for first-time investors, and how current investors should react to a recession.

By Lora Korpar

Many are wondering what to do with their investments or whether to start investing as the United States likely heads toward a recession.

Investing can appear complicated. Throw a recession into the mix, and people become nervous and unsure.

But investing during a recession is possible and, in some cases, even beneficial. Whether you are investing for the first time or are a seasoned investor, it is vital to understand how your finances are best protected during an economic downturn.

“Even though we have general averages and statistics about how historical recessions have gone, it's very difficult to predict how current recessions will go because recessions really are a complex mix of different variables with different factors,” said Richard Coffin, an investment analyst and host of investment education YouTube channel The Plain Bagel. “No one knows what will happen, so focus on the long-term, investing in good companies and managing your risk when times are good and when times are not as good.”

I spoke with Coffin and financial advisor Maylan Studart to discuss the benefits and risks of investing during a recession, plus tips for how to do so in the safest way.?

Risks And Benefits of Investing During a Recession

Investing always has elements of risk and reward, but a recession can amplify both. Stock prices fall during recessions, providing a good opportunity to buy at a price lower than usual.

“[A recession] is actually a very good time to invest in the markets because business sentiment is low,” Studart said. “And business is cyclical, so there is the growth, the peak, the decline and the trough. So if you're assuming that we're in recession and we are approaching a trough, that's the definition of ‘buy low, sell high,’ which is what you want to do.”

“When people are more nervous, there's more selling activity. And sometimes there are companies that are very strong on a fundamental basis that will still see their valuation compressed, so there might be more of an opportunity to invest at a cheap price,” Coffin added. “Because at the end of the day, when you invest, you're just buying part of a company. So obviously for most people, you want to do that at a low cost and you have more upside if you do that.”

However, a company you invested in going out of business during a recession is a risk you have to weigh.

“As an investor, if you're buying into positions during a recession, especially if you're going after higher-risk positions, you face the risk of losing money,” Coffin said. “And stocks tend to fluctuate in the short term during a recession. When there's this uncertainty, you tend to see prices move a lot more. On a short-term basis, that can also be very stressful for investors.?

“So there's actually a lot of risk on the personal side of it as well, in terms of not just feeling stressed out, but also managing your emotions and trying to keep your money in the stock market when you have these forces working against you.”

Studart said taking your time in the market is key to a successful investment.

“As a financial advisor, we believe in time in the markets,” Studart said. “The more time your money is invested in the markets and compounding and dividends are being reinvested, the higher the probability of you having positive returns over time and growing your wealth.”

First-Time Investing During a Recession

Studart stressed the importance of dollar-cost averaging whether you are in a recession. This means investing a fixed amount at regular intervals instead of throwing in one large sum.?

For example, you could invest a percentage of each paycheck or a dollar amount per month. Studart said this practice is “betting on growth” even if the economy is not in an ideal place.

“Even if markets do go down while you’re dollar-cost averaging, you're going to get a cheaper average cost of your purchase price in the long run because you're buying in increments,” Studart said.?

Certain companies might also be safer bets to invest in during a recession. Coffin and Studart said utilities, real estate and “consumer staples” like grocery stores tend to stay afloat during recessions because people continue to use them even in the worst economic conditions.

“Consumer staples are by definition things that consumers rely on whether times are good or bad,” Coffin said. “It's not to say that these positions will necessarily do well, but it's to say that they tend to face less risk in terms of going bankrupt and things like that during a recession.”

Nerdwallet added that communication services, health care, financials, industrials and consumers discretionary – like apparel and restaurants – also tend to perform well during recessions.

Coffin said investments in the tech sector are riskier because new technologies tend to be “future-oriented,” meaning overlooked in the short term. However, you never know what will recover from economic hardship.

“The reason why [determining which sectors are safe] is tough is because by the time we realize we're in a recession, the actual stock positions might already be recovering from it,” Coffin said.

Also, note your financial situation before you begin investing. Coffin and Studart say to have certain financials settled before jumping into an investment.?

Have three to six months of income ready for emergencies to spend on “core expenses.” These include food, transportation, housing and utility costs.

“Even taking the recession out of it, I would never invest any money unless I have emergency savings built up,” Studart said. “Life is like the markets – it goes up and down and you have to be prepared for an emergency.”

Coffin and Studart also suggest budgeting to be in a healthy enough financial position to invest.

“Budgeting is a big [factor to consider], so make sure you are saving more than you're spending,” Coffin said. “If you aren't, I think that deserves a lot more attention than your investing.”?

Studart said your budget should account for core expenses, plus expenses that are more wants than needs, like dining out. Also, include taxes in your budget.

“Do your budget, see how much you can shave off toward your emergency savings,” Studart said. “And always keep the emergency savings liquid in a money market [account], because that's what it's there for – so that it doesn't interrupt your investments.”

Coffin added that you should consider your debts before investing. Make sure any credit card debt is under control. Mortgages are not as cut-and-dry because you might be able to establish an investment portfolio even with a mortgage, depending on your risk tolerance.

Also, Coffin said to examine the time horizon, or the length of time you plan to keep the investment, and job security before investing during a recession. Consider the industry you are working in and evaluate the risk of job loss. That will help determine your risk tolerance.

“Once you're at that position where your budget is under control, you're saving money, your debts are under control, you're not spending a whole lot of money on interest payments, you have a rainy day fund … you can really consider focusing heavily on investing,” Coffin said.

What to Do with Current Investments in a Recession

What if you already have investments and a recession hits? Coffin and Studart say not to panic. Stick to the long-term investment plan from before the recession, even if prices tank.

“Every investor has a different risk-return profile, and you have to understand that about yourself,” Studart said. “What is your plan? Is it to save for retirement? Is it to buy a home? Is it to pay for college? That plan is how you should be acting on your investment. So just because the markets correct doesn't mean you should be doing anything [different.]”

Coffin suggests ignoring the short-term effects of a recession on your investments unless you took a “higher-risk approach” in an investment that your financial situation can no longer handle.

“You want to look to long-term and try to ignore short-term fluctuations because half of good investing is managing your emotions and your behaviors around your positions,” Coffin said.

Studart says people should treat their investments like a mathematical equation when they feel emotional about the direction of investment. She suggests those who have a plan “stay put.” Those who do not have a plan should seek help. This can come from a financial advisor, someone in your life who is well-versed in investing or even from internet research.

“Understanding your cash flow [by budgeting] is really going to help you organize these thoughts so you can be comfortable with the amount you're putting away for an emergency, the amount you're putting away for your future and your retirement, the amount you're spending,” Studart said. “Understanding your personal finance is going to really help you during a recession.”

Overall, Coffin encourages people not to obsess over the stock market's day-to-day and trust their investment plans.

“The vast majority of people aren't day traders, but we'd like to act as though we are, where we check the prices every day,” Coffin said. “And we make this mental note of, ‘I should have bought,’ ‘I should have sold,’ what have you. But really our behavioral and emotional buying is working against us. So try to ignore all the day-to-day fluctuations, assuming that you're in a good investment product or you did your research properly.”

Top Takeaways

Investing during a recession

• Businesses are cyclical, so investing during a trough could earn you money during a peak. But you also risk a company going out of business during a recession.
• Practice dollar-cost averaging whether in a recession or not.
• No investment is 100% safe, but consumer staples, real estate and utilities are less likely to be bankrupted by a recession.
• Make sure to have a healthy budget, emergency funds and little to no debt before considering investing.
• Stick to your long-term plan, and don’t stress about daily fluctuations during a recession.