If I Could Tell Every Investor 1 Thing About Preparing for a Recession, It's This
Key Points
Many people choose to sell their stocks during a recession and a bear market.
That's usually the wrong move and can damage your long-term returns.
Investing through a recession, however, can actually enhance your returns over time.
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Recessions can be scary. Incomes can shrink, and job security can be threatened. From an investing perspective, these are often the periods where the S&P 500 can fall 20% or more.
But if there's one thing I would tell investors about how to handle their portfolios during a recession, it would be this:
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A recession is exactly when you don't want to stop investing
That's because recessions have historically produced some of the best long-term buying opportunities for investors. If you're able, continuing with systematic investing plans allows you to buy shares at significant discounts to their previous levels.
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The catch is that you have to maintain that long-term perspective and avoid the temptation to exit stocks when economic conditions get tougher. If you sell when prices are already low, you not only lock in losses but you'll also likely miss out on an eventual rebound and recovery.
Think of it like this: If stocks hit an all-time high, drop 20% due to a recession, and then recover to recapture that high, your total return is 0% if you rode it all the way out from high to high.
If you continue investing through the recession, however, you're continuously buying shares at prices well below that all-time high. By the time that a new all-time high is reached, your returns are sitting in positive territory thanks to the gains you've gotten from all of those individual buys along the way.
Recessions don't have to be scary events. If you view them as opportunities instead, you can enhance your long-term returns.
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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