Earlier this month, economists declared that the United States is officially in recession, and believe it or not, that means it is a good time to invest. The reason? Stock values tend to fall during a recession, which means you have a chance to get some quality investments at a relatively low price (although to be clear, this recession is a bit unusual in that stocks are remain strong despite high levels of unemployment and the general economy) uncertainty).
Still, it’s natural to be nervous about the idea of investing during a recession, especially if you’re fairly new to buying stocks. If that’s the case, here are some moves that could help you avoid serious losses while sailing in these unusual times.
1. First have a fully loaded emergency fund
When you buy stocks during a recession, the last thing you want is to liquidate them at a loss when the need for money arises. As such, you need to make sure you have a healthy emergency fund before investing. To be truly recession-ready, that emergency fund should have enough money to cover the essential living expenses of about six months. If it’s not there yet, increase your savings and then Start investing so you don’t get stuck in a position where you risk blocking losses.
During a recession, stocks may underperform overall, but some market segments may take a harder hit than others. Think about the circumstances of our current recession. It’s clear that due to COVID-19, travel stocks may have a more difficult recovery than other segments, so you really wouldn’t be lucky if they represented 75% of your portfolio. In fact, diversification is a crucial step on the road to avoid losses, so when buying stocks, be sure to target different segments. Another option? Buy some S&P 500 index funds. That way, you get a combination of stocks that automatically make up a diverse portfolio.
3. Focus on essential goods and services.
While all stocks have the potential to take a beating during a recession, certain essential goods and services are somewhat recession-proof, meaning that people may be reducing purchases of clothing and electronics, but everyone needs food, electricity and water to live. . As such, you could pay to add stocks of food, utilities, and energy to your portfolio. Those stocks are most likely to move with the general market, but they are less likely to fall victim to under-consumption.
4. Charge Dividend Stocks
Dividend stocks are a valuable asset to keep during a recession. First, they can serve as a source of income at a time when money may be tight. Second, dividend-paying stocks can often continue to do so even when their stock prices drop, which could help offset other losses you might see in your portfolio. And remember, dividends can always be reinvested so you can further increase your wealth.
If you’ve been close to investing, now may be the perfect time to dive in, even though there’s a recession on us. Take the right strategy, and you’re more likely to make money than lose money.