When the economy turns, most people do one of two things: panic and sell everything, or freeze and do nothing. Both are mistakes.
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 incorporate expectations and generally falls before a recession even begins – meaning by the time everyone is talking about a recession, prices may already reflect much of the bad news.
Even investors who bought into an S&P 500 index fund in March 2008, right as the Great Recession was starting, earned total returns of nearly 600% from that point to today. The key word is held.
What to Do
Keep investing. If you have a regular contribution schedule, keep it going. Missing the best days of a recovery can significantly affect your long-term results – and those best days often come when things still feel terrible.
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.
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.
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 by 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.
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.
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.
Related: What Are Dividends – and How Do You Find Good Ones?