The COVID-19 crisis has affected the United States economy, and we are now in a recession that could easily last until 2021. In light of that, you can assume that now is a terrible time to invest, when in reality, the opposite is true.
Stock values have the potential to fall during a recession (although they have largely remained strong so far), and that means you have a chance to get quality investments at a discount. But if you are going to invest in the next few months, make sure you have good answers to these questions first.
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1. Do I have a fully loaded emergency fund?
If you liquidate investments when they are down, you are guaranteed to lose money, there is no way to avoid it. The key, therefore, is to ensure that you have the ability to cover your living expenses without resorting to the sale of shares. And an emergency fund is your ticket in that regard.
Under normal circumstances, you should aim for living expenses of three to six months in the bank. For a recession, six months is better, and if your income is variable, you may want to aim beyond that point. If you don’t have emergency savings, you will risk having to sell your investments in what could be a terrible time, so don’t add to your portfolio until you have a good six-month cash value.
2. Do I have a specific strategy?
Investing during a recession is a good idea, as long as you don’t dive blindly. Rather, think a little about how you will do it. Will it target a diverse mix of stocks? If so, index funds are a good bet because they simply track existing market indices and, as a bonus, take a lot of the research and guesswork out of investing.
On the other hand, you may decide to specifically target stocks that are likely to be recession-proof. For example, food spending is likely to remain stable, even when people struggle with loss of income, so that’s a segment to consider. Similarly, people still need water and electricity during a recession, so you can see how to add utility stocks to your portfolio. There is no single correct strategy to employ at a time like this, but you must make some kind of plan.
3. What happens if my portfolio value plummets in the coming months?
We have just reviewed the fact that an emergency fund can save you financial losses if your equity investments accumulate in the course of a recession. But that doesn’t address the mental or emotional implications of seeing big losses on paper or on screen.
Before investing for a period that might well be loaded with volatility, ask yourself if you are equipped to handle those abrupt changes and have the ability to sit back and let your portfolio be when stock values decline. If you are a naturally impulsive person who is likely to panic during a recession, then you may want to invest minimally or otherwise pass your investment on to a financial advisor, who will not pull the trigger and sell your investments. minute they decrease.
There is no reason to walk away from the stock market just because the economy is bad. On the contrary: now could be a good time to invest. Just make sure you’re equipped with cash reserves, a strategy, and the right mindset before moving on.
