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8 Tips for Investing During a Recession
When the economy is facing a recession, it can be a challenging time for investors. The stock market may be volatile, and it can be challenging to navigate the uncertainty. However, there are a few steps investors can take to manage their portfolios and potentially come out ahead during a recession.
Here are 8 tips for investing during a recession:
- Create a strategy: The first step in investing during a recession is to have a plan. This a road map for achieving your financial goals, and you should have contingency plans for bad times.
- Reassess your risk tolerance: A recession can be an excellent time to reassess your risk tolerance and ensure your portfolio is aligned with your willingness to take on risk. If you are more risk-averse, consider increasing your allocation to cash and fixed-income assets.
- Diversify and rebalance: Diversification is key to managing risk in your portfolio. During a recession, it can be essential that your portfolio is well-diversified across different asset classes and sectors. It is also a good idea to periodically review and rebalance your portfolio to ensure it is properly diversified. Rebalancing moves the diversified asset classes (i.e. stocks and bonds) back to their original percentages to align with your risk tolerance. During bull (and bear) markets, it is common for assets to drift higher (or lower) from their original allocation.
- Dollar-cost averaging: Dollar-cost averaging (DCA) is a strategy for investing a fixed amount of money (or percentage of income) at regular intervals, regardless of the investment's price. This strategy removes the temptation to try and time the market. Using DCA during a recession allows you to take advantage of lower prices and potentially improve your long-term returns.
- Consider your time horizon: It is important to keep in mind your long-term financial goals when investing during a recession. A longer time horizon may allow you to weather short-term market volatility and come out ahead in the long run.
- Tax efficiency: A recession can also be an opportune time to review your portfolio with an eye toward tax efficiency. This may include utilizing ETFs instead of mutual funds, harvesting losses to offset gains, or considering investments that are taxed at more favorable rates.
- Keep an eye on costs: Fees and expenses can eat into your investment returns, so it is important to keep an eye on the costs associated with your portfolio. During a recession, it may be especially important to minimize unnecessary expenses.
- Consider working with a financial advisor: If you feel uncertain about navigating the market during a recession, working with a financial advisor may be helpful. A financial advisor can help you create a personalized investment plan suited to your financial goals and risk tolerance. Advisors also have experience with adverse market conditions and can help clients maintain investment exposure during difficult times.
By following these tips, you can take control of your investments and enhance your potential to improve your outcome during a recession. However, it is important to remember that investing always involves risk. It is recommended to do your own research (or hire someone on your behalf) and make sure that you are comfortable with the level of risk in your portfolio.
This content is developed from sources believed to be providing accurate information, and provided by Verity Wealth Partners and Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.