Expansion and contraction is a normal function of the stock market. However, sharp and sudden contractions that continue over time can transition us from bull to bear and cause a recession. Its certainly a little bit trickier to invest during a recession or market downturn, but not a lost cause.
First things first: If the market takes a turn, do not sell off your stocks in a panic. The simplest, most basic fundamental of investing is to “buy low and sell high” and when we sell off shares during a downturn we do the opposite. Take a breath. While its true that minimizing risk feels like the right thing to do, when you sell to cut losses you could also be selling yourself short.
The market might crash harder as circumstances change. Or it might bounce back thanks to financial regulations. Which is more likely? Nobody knows and thats the whole point: Timing the market is a game for professionals, not average everyday investors. Also worth noting: Most professionals are pretty bad at it. Study after study shows that active investors, like day traders and people who absorb info and use it to trigger quick buys and sells, dont do as well over the long term as passive investors, meaning those who buy the broad market and hold.
The best way to make an informed decision is to look at past data, even in unprecedented times. Historically, the has market followed an upward trajectory over time. Not each year, not each month, week, or day. But always up. Historically, the market provides 10% returns to its balanced investors who hold and adjust for their own risk tolerance. A balanced investor also buys into safer investments while making room for the growth-driven and income-creating stocks.
This long-term strategy is similar to value investing. The foundations of both long-term and value investing rely on the purchase of stocks at a price below their intrinsic value and holding them until their price reflects the real value of the company. Simply put, buy low and sell high.
Investors like Warren Buffett use this strategy and maintain its success by embodying the first pillar: Keep your cool. Dont let fear and greed change your strategy and never, ever, sell in a panic. The market moves, thats what it does. By letting your emotions run high and selling when prices drop youre going against the principals of long term value investing. How long youll sit on your stock holdings is determined by your risk tolerance.
How do you determine your risk tolerance?
Inherently, every investment comes with some risk and its all about finding a balance that youre comfortable with and what makes sense most for your stage in life. Risk tolerance, or the amount of unknown you are willing to take on to potentially gain rewards, is defined by a few things.
Take a good long look at your investment goals and experience, then pair that with how much time you have to invest, and finally review your total amount of financial resources. A person who has the goal of retiring in 40 years, no investment experience, and no income outside of traditional work will have a very different risk profile than a person who wishes to liquidate their assets in under ten years, is a seasoned investor, and who has a steady stream of passive income. Knowing what works for you right now will shape how you move forward.
If you would rather do all that deep reflection, the basic rule of thumb is the shorter your time horizon, the less risk you should take on.
The old axiom used to be that investors should “own their age” in bonds. So, if youre 40 you should have your investments split to include 40% bonds. The logic behind this is that bonds have traditionally been relatively “safe” investments and we are meant to take on less risk as we get closer to retirement age. However, the bond market, our lifespans, and access to fee-free investing have complicated this bit of advice.
How to invest when the market is trending down
While a down market or recession is hard on everyone, there are certain industries that thrive in that market environment. Pharmaceutical companies, healthcare providers, tax service specialists, end-of-life services, and utility companies are all great examples of businesses in industries that do well in spite of a poorly functioning economy.
Publics Water Works theme is a group of 20+ stocks and 1 ETF that handles the management and distribution of water. Utility companies like California Water Service are represented as well as do-good brands like Xylem.
By searching Publics themes of stock holdings for these historically “recession-proof” businesses, you can create a portfolio designed to weather the storm. That said, keep in mind that every economic scenario is different, and that past performance is no guarantee of future results.
What to do if the market is trending down and/or enters a recession?
Investing during a down market or recession may mean making different investment choices. There are a few options that typically fare well, despite the industry. Blue-chip stocks are one. Blue-chip stocks are the big names that you know and they arent going anywhere soon. These stocks all have a few things in common: robust cash flows, healthy financials, and stocks that you can own and sleep well at night regardless of the markets ups and downs. Blue-chips generally sacrifice some growth potential in exchange for greater predictability and dividend income.
You can find several blue-chip holdings is Publics curated Themes like American Made and Baby, I Got Your Money. McDonalds, Wells Fargo, and the iShares US Financial Services ETF are all great examples of blue-chip investment options.
Consumer staples could be another strong option. Examples of consumer staples include food, drugs, drinks, tobacco, and basic household products. These are things that people are unlikely to reduce their demand for when times are tough because people see them as basic needs. Companies that fit this category are woven throughout just about every Public theme, from Click It, Ship Itto Health and Wellness.
Dollar-cost averaging in a down market or recession
Dollar-cost averaging is an investment strategy that involves investing a fixed amount of money in the same funds or stocks at regular intervals over long periods of time. If you have an employer-sponsored 401(k) retirement plan to which you contribute at a monthly, set cadence, then that is essentially how your 401k contributions work already.
When you set up recurring investments, you average out your purchase price over time and help prevent all of your purchases from going through at a high point for stock prices. Its impossible to time the market, and the experts say dont even bother trying. Instead, purchase throughout the year and the price youve paid per share will be averaged out over the highs and lows of that whole 12-month period.
No one knows when a down market will turn around, but it eventually will if history is any indicator. By investing in slow, steady drips youll even out those price points over time. Dollar-cost averaging is a savvy investors best friend.
Public makes it possible to assemble a portfolio of companies amid a down market or recession by offering the ability to buy stocks in fractional shares, AKA slices. This means that you dont pay the full share price of public companies, but rather invest with what youre able to. The shares are divided up into slices, making it possible for you to invest $20 and buy a slice of a $100 stock.
The bottom line
Investing during a recession is possible, and could prove to be a smart move for you depending on your risk tolerance. By using a dollar-cost averaging strategy you are able to smooth out the stock price highs and lows over time. Some of your stocks will be purchased on the dip and some will be purchased at a high point, and thats the beauty of dollar-cost averaging. Using a platform like Public makes it simple to invest regularly in companies that align with your values, the current economy, and your budget.