Should you pull out of stocks during a recession?
Recessions do not mean that you should pull out of all your investments. A decline in stocks can mean opportunities for investors to buy valuable long-term investments at discounted prices. Distinguishing between what you should let go of and what you should stay invested in is a crucial first step.
Some investors believe that by selling during a downturn, they can wait out difficult market conditions and reinvest when the market looks better. However, timing the market is extremely difficult, and even professionals who attempt to do this fail more often than not. That's especially true with funds.
The Bottom Line
Instead of selling out, a better strategy would be to rebalance your portfolio to correspond with market conditions and outlook, making sure to maintain your overall desired mix of assets. Investing in equities should be a long-term endeavor, and the long-term favors those who stay invested.
Historically speaking, investors who hold on to their investments through recessions see their portfolios completely recover, and individuals who don't invest in the market at all lose out.
- You've found something better. ...
- You made a mistake. ...
- The company's business outlook has changed. ...
- Tax reasons. ...
- Rebalancing your portfolio. ...
- Valuation no longer reflects business reality. ...
- You need the money. ...
- The stock has gone up.
Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.
Moving your portfolio from stocks to cash is an understandable instinct when savings rates are high and there are concerns about a possible recession. But it's important to remember that stock market investments are part of your long-term plan, and selling could have tax implications.
Avoid becoming a co-signer on a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt. Don't quit your job if you aren't prepared for a long search for a new one. If you own your own business, consider postponing spending on capital improvements and taking on new debt until the recovery has begun.
Equity Sectors
On the negative side, energy and infrastructure stocks have been the hardest-hit in recent recessions. Companies in these sectors are acutely sensitive to swings in demand. Financials stocks also can suffer during recessions because of a rising default rate and shrinking net interest margins.
During an economic downturn, it's crucial to control your spending. Try to avoid taking on new debt you don't need, like a house or car. Look critically at smaller expenses, too — there's no reason to keep paying for things you don't use.
How to profit during a recession?
Many investors turn to stocks in companies that sell consumer staples like health care, food and beverages, and personal hygiene products. These businesses typically remain profitable during recessions and their share prices tend to better resist stock market sell-offs.
- Defensive sector stocks and funds.
- Dividend-paying large-cap stocks.
- Government bonds and top-rated corporate bonds.
- Treasury bonds.
- Gold.
- Real estate.
- Cash and cash equivalents.
Generally, the industries known to fare better during recessions are those that supply the population with essentials we cannot live without that. They include utilities, health care, consumer staples, and, in some pundits' opinions, maybe even technology.
The strategy is very simple: count how many days, hours, or bars a run-up or a sell-off has transpired. Then on the third, fifth, or seventh bar, look for a bounce in the opposite direction. Too easy? Perhaps, but it's uncanny how often it happens.
The 3-Day Rule in stock trading refers to the settlement rule that requires the finalization of a transaction within three business days after the trade date. This rule impacts how payments and orders are processed, requiring traders to have funds or credit in their accounts to cover purchases by the settlement date.
Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.
Investing in funds, such as exchange-traded funds and low-cost index funds, is often less risky than investing in individual stocks — something that might be especially attractive during a recession.
Heading toward a potential recession is not the time to own growth stocks. “Growth stocks, especially profitless companies that are tied to high growth prospects, do worse during recessions,” Nakadi says. Instead, consider more income-producing investments and dividend-paying stocks.
A good investment strategy during a recession is to look for companies that are maintaining strong balance sheets or steady business models despite the economic headwinds. Some examples of these types of companies include utilities, basic consumer goods conglomerates, and defense stocks.
If your goal requires quick access to cash, you'll likely opt to hold money in a savings account or similarly liquid space. On the other hand, if you're hoping for better returns on your money than can be achieved with savings account interest rates and over a long time, then investing may be the answer.
Is cash king in 2024?
Why cash is still king: investors take advantage of high interest rates and maximise flexibility. Cash is seen as the most attractive asset class moving into 2024, according to a new survey.
As a rule of thumb, financial advisors generally recommend holding three- to six-months' worth of living expenses in a cash account that's easy to access. By keeping your emergency fund in cash, you avoid the risk of having to sell other assets you own, such as stocks, at a potential loss when something comes up.
Recessions can impact your savings in many different ways. Lower interest rates, stock market volatility, and potential job loss can drain your savings. Diversifying your investments, building an emergency fund, and opening a high-yield savings account can help protect your savings.
For investors, “cash is king during a recession” sums up the advantages of keeping liquid assets on hand when the economy turns south. From weathering rough markets to going all-in on discounted investments, investors can leverage cash to improve their financial positions.
It's safe from the stock market: If a recession causes short-term market volatility, you won't lose money on your high-yield savings deposits, unlike investing in the stock market.
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