What to Do and What to Avoid
Updated: 07.28.2026
When the economy turns, most people do one of two things: panic and sell everything, or freeze and do nothing. Both are mistakes, and both are a lot easier to avoid once you know what’s actually going on versus what the headlines are telling you.
Here’s how to actually handle your investments when things get rough.
Recessions Are Normal, and Temporary
A recession is a period of declining economic output, usually lasting anywhere from a few months to a couple of years. The stock market almost always drops alongside it.
What most investors don’t realize: the market tends to fall before a recession officially begins, and often starts recovering before the recession officially ends. That’s because the market prices in expectations, not just current conditions. Here’s a real example of how far behind the official call can run: the 2008 Recession started in December 2007 by the government’s own dating, but the National Bureau of Economic Research didn’t officially declare it had begun until December 2008, a full year later. By the time “we’re in a recession” becomes the headline, the market has often already priced in a lot of the bad news.
Even investors who bought into an S&P 500 index fund in March 2008, right as that recession was underway, would be sitting on total returns (with dividends reinvested) well over 600% by now, some calculations put it closer to 670%. The key word is held.
Are We Actually in a Recession Right Now?
Since this is genuinely on people’s minds: as of mid-2026, the US is not in a recession by the standard definition at the time of writing of this article. But the picture is mixed enough that the confusion is understandable. Growth has been running around 2% annually, mostly propped up by heavy AI-related business investment. Unemployment has drifted up from around 4.1% to somewhere near 4.3-4.4% as job growth has slowed to a crawl, though layoffs themselves remain historically low, hiring has just gotten very selective. Inflation is still elevated and stickier than the Fed would like, which has some economists talking about a mild “stagflation” scenario (slow growth plus persistent inflation together) rather than a clean recession or a clean expansion.
Forecasters currently put the odds of a US recession sometime in the next 12 months anywhere from about 15% to 30%, depending on who you ask. That’s a real, non-trivial risk, but it’s not the majority prediction either. Genuinely uncertain, mixed-signal territory is a fair way to describe where things actually stand, not “definitely fine” and not “definitely a recession.”
The Opportunity Most People Miss
Here’s the flip side of everything above, and it’s real: recessions are also when serious wealth gets built, just not usually the way people picture it. It’s tempting to imagine “smart money” hunting through the wreckage for the one broken company about to turn around. In practice, the actual advantage almost always belongs to whoever has cash available when everyone else is forced to sell. Prices don’t drop because assets suddenly became less valuable long-term, they drop because a wave of people need to sell at the same time, whether that’s from margin calls, layoffs, or plain fear. The person on the other side of that trade, buying the same diversified index fund at a 30-40% discount, is the one who ends up ahead a few years later.
That’s why cash matters so much heading into a downturn, not because you’re trying to time the exact bottom, but because liquidity is what turns a recession from something that happens to you into something you can act on. Beyond your 3-6 month emergency fund, if you can keep some extra cash on hand or simply keep your regular contributions running without interruption, you’re already doing what the people who come out ahead actually do. It’s less exciting than a story about doubling your money on some beaten-down stock, but it’s the version that’s repeatable and doesn’t depend on guessing right.
What to Do
Keep investing. If you have a regular contribution schedule, keep it going. Missing the market’s best days can significantly affect your long-term results, and those best days often show up when things still feel terrible. One widely cited comparison: $10,000 invested in the S&P 500 and left untouched for 20 years grew to nearly $65,000. Missing just the 10 best trading days during that same stretch cut the result roughly in half. Worth knowing too: the best and worst days tend to cluster together, often within days of each other, which is exactly why trying to dodge the bad days by pulling out usually means missing the good ones too.
Lean toward defensive sectors. Consumer staples, healthcare, and utilities have historically been less volatile than the broader market during downturns, companies selling things people still buy regardless of the economy.
Hold or add to index funds. S&P 500 index funds are one of the most reliable recession investments for long-term investors. By buying an index fund, you’re effectively betting on the long-term success of American business as a whole rather than any single company’s ability to survive a rough patch. If you haven’t built your core holdings yet, I laid out a straightforward approach in How to Build a Simple 3-Fund Portfolio, and if you’re still deciding where to hold any of this, How to Choose a Brokerage Account covers that.
Shore up your emergency fund. Before anything else, make sure you have 3-6 months of expenses in cash. Never invest emergency savings or cash you might need in the short term. You don’t want to be forced to sell stocks at a loss because you needed the money.
Not sure whether to buy ETFs or mutual funds? Here’s the plain English breakdown: ETFs vs Mutual Funds.
What to Avoid
Don’t try to time the bottom. Nobody knows when the market will hit its lowest point, not you, not professional fund managers. Trying to time the market is a losing battle.
Don’t panic sell. Selling when stocks are down locks in your losses permanently. The only people who actually lose money in a market crash are the ones who sell.
Avoid high-yield “bargain” stocks. Stocks that have fallen 80-90% might seem like bargains, but they’re usually cheap for a reason. A broken business at an excellent price is still a broken business. This is one more reason a broad index fund beats picking individual names during a downturn, you’re not stuck guessing which battered stock is a real bargain and which one is just headed to zero.
The Simple Recession Strategy
Stay invested. Keep contributing. Hold diversified, low-cost index funds. Trim anything speculative that you wouldn’t want to hold through a two-year downturn. If that includes a crypto allocation, that’s exactly the kind of position I mean in Crypto ETFs vs Crypto IRAs, keep it small enough that a rough stretch in the broader market doesn’t wreck your plans.
In a recession, it’s not about finding the one perfect investment. It’s about building a mix that lets you sleep at night, stay invested, and be ready when things turn around.
The investors who build the most wealth through recessions aren’t the ones who made the perfect trades. They’re the ones who didn’t panic.
Frequently Asked Questions
Not by the standard definition, as of mid-2026. Growth is positive but modest, unemployment has drifted up, and inflation remains elevated, which is genuinely mixed territory. Forecasters put the odds of a recession in the next 12 months at roughly 15-30%, a real risk, but not the majority prediction.
Generally no. Selling during a downturn locks in losses that a paper loss would have otherwise recovered from over time. The market has historically recovered from every past recession, though the timeline isn’t guaranteed to repeat.
No. Stopping contributions during a downturn means missing out on buying shares at lower prices, which is often when the eventual recovery does the most work for you.
Not usually. A stock that’s fallen 80-90% is often cheap because the underlying business is genuinely struggling, not because it’s secretly undervalued. Broad index funds avoid this guessing game entirely.
Often not until well after it’s already ended. Official recession dating comes from a committee that reviews data with a significant lag, sometimes announcing a recession’s start or end a year or more after the fact. The market itself usually starts recovering before that official announcement ever comes.
Related: What Are Dividends – and How Do You Find Good Ones?
Sources
- S&P 500 total return since 2008: officialdata.org
- Cost of missing the market’s best days (JPMorgan data): Finley Davis
- Best/worst days clustering together: A Wealth of Common Sense
- Current US economic conditions and recession odds: Statistics of the World, U.S. Bank Economic Outlook