Is it safe to invest during a recession?
The COVID-19 crisis has already upended the U.S. economy. Right now, millions of Americans are out of work while countless small businesses are at risk of shutting down on a permanent basis. As such, there's talk that we may wind up with a full-blown recession on our hands.
There's no single definition of what a recession is, but the classic description is a period of economic decline lasting several months or longer. And hard-core economists will tell you that it's a decline in gross domestic product for two or more consecutive quarters.
Since we've only been grappling with the impact of COVID-19 since March, we're technically not at that point. But technicalities aside, it's safe to say that we're seeing recession-like characteristics -- widespread job loss, fewer available jobs, and government relief that's consistent with previous periods of economic distress (think stimulus payments and increased unemployment benefits).
All of this begs the question: If we're in pre-recession territory, or are heading in that direction, is investing a good idea? Or should you take every dollar you have and keep it in cash?
A great opportunity -- under the right circumstances
Another thing that tends to happen during a recession is that stock values decline. That's bad news for an existing portfolio, in theory, though leaving investments alone means not locking in recession-related losses. But also, lower stock values offer a solid opportunity to invest on the relative cheap. As such, investing during a recession is good idea, but only under the following circumstances:
- You have plenty of emergency savings. You should always aim to have enough money in the bank to cover three to six months of living expenses, with the latter end of that range being more ideal. If you're there, and you have extra money at your disposal, then you're free to invest it. If not, be sure to build a solid emergency fund first.
- You're not planning to touch your portfolio for at least seven years. Investing during a recession isn't for the faint of heart. You may think you're buying at a low, only to see your portfolio value decline a few days later. The best way to avoid losses -- and come out ahead -- in a recession is to take a long-term approach to investing, and to plan on leaving your money alone for at least seven years.
- You're not going to check your portfolio obsessively. When the economy is in bad shape and there's lots of stock market movement, you may be more inclined to log onto your brokerage account every day and see how your portfolio is doing. But if you're going to invest during a recession, you simply shouldn't do that. The more you check up on your investments, the more likely you are to panic. And when you panic, you risk making rash decisions, like unloading poorly performing stocks, that force you to lock in losses.
It's perfectly OK, and in fact, advisable, to invest during a recession -- but only if you're in a strong enough financial position to do so, and only if you have the right attitude and approach. You should never compromise your near-term financial security for long-term gain, so remember, if you're hurting financially, there's no shame in missing out on opportunities, either.
Right now, a lot of people are struggling because of the COVID-19 situation, so don't stress if you don't feel comfortable investing in the coming weeks or months. Instead, focus on paying your bills and staying physically and mentally healthy. You can always ramp up your investments at a later point in life -- one when your job is more secure, your earnings more steady, and your mind more at ease on a whole.