One of the biggest concerns that people have when investing in the stock market is that a recession will occur. In most investor’s minds, the second that they buy their first stock, the market will instantly plunge into the second Great Depression.
Even though the odds of this happening are slim, the good part is that if that even if this does happen then there are still ways that you can invest in the stock market safely.
These are our tips for how you should invest in the stock market during a recession.
Find the exceptions
In every type of economic atmosphere, there are almost undoubtedly companies that will thrive. We just saw a few great examples of this during 2020. The coronavirus pandemic was forcing businesses closed in a way that we’ve never seen before. However, the most forward thinking investors might have looked a few months ahead and recognized which companies would thrive in this environment. Companies like:
While the overall market was crashing, these companies were performing very well. Of course, it’s never advisable to put all of your money into just a handful of stocks. However, identifying just 1-2 winners can help offset your losses. If this means breaking even in a year when the overall market was down, you’re winning.
Diversification is one of the golden rules of investing. Even if you’re entering the market during a recession, it’s still a wise move to make sure that you’re putting your money into a few different types of stocks.
One of the easiest ways to do this is to invest in what’s called an index fund. Index funds track a basket of different types of stocks for you and then allow you to invest in their fund. The best part is that you can even invest in different types of index funds. For example there are funds that track:
- The entire U.S. stock market
- The global stock market
- Emerging markets
- Chinese stocks
- Small, mid, or large cap stocks
With just a little bit of research, you can go through and find the types of index funds that fit with your portfolio. This is one of the easiest ways to diversify your portfolio.
Invest in things other than stocks
Another important thing to do during a recession is to invest in things other than stocks. Sometimes, when the stock market is down it means that other assets might perform better. Here is a quick guide of when it’s best to invest in different assets.
During a “normal” economy
- Stocks – Good
- Cash – Not ideal
- Gold – Not ideal
- Cryptocurrency – Good
- A business – Good
During a recession or down economy
- Stocks – Not ideal
- Cash – Good
- Gold – Good
- Cryptocurrency – Good
- A business – Not ideal
Remember that these are just general guidelines and that your own decisions should depend on your investment goals, portfolio, investing timeline, etc.
We hope that you’ve found this article valuable when it comes to understanding how you can invest in the stock market during a recession. If you’re interested in reading more, please subscribe below to get alerted of new articles as we write them!