People are always concerned about recessions and for good reason. People have money invested in the markets, and they want to make sure that they do not lose it. They don’t want to lose all their hard earned money. It’s a problem when people start selling stocks and other assets at the wrong times and buying at the wrong times. People sell more when the markets are tanking, thus further driving the decrease in prices during a recession. People also buy more when everyone else is excited about buying, thus further adding to an overvalued, over-inflated market. However, mixing these two together is a sure way to lose money in the long run. Warren Buffett summed this concept up beautifully, “Be fearful when others are greedy and greedy when others are fearful.”
Personally, I’ve heard many stories of people losing a substantial amount of money during the recession. I’ve heard of people’s 401K retirement funds dropping by half. I’ve heard of people aggressively buying when the market was getting higher and higher, only to lose most of their money a few months later after they’ve decided to sell their holdings during a downturn. When I was in college, I was on a student-run investment fund that lost close to 50% of its value in one year. Thankfully, measures can be taken to stabilize your portfolio and investment income.
Take a look at the chart below from macrotrends.net, which shows the historical performance of the Dow Jones Industrial Average from 1914 to today. It is representative of the US market over the long run. The gray vertical bars represent recessions.
What You Can Do?
You’ll notice that there have been plenty of recessions throughout history. However, the overall trend is that the market still goes upwards. If you would have sold during each recession, you would have missed out on all the gains from the stock market rebounds unless if you knew exactly when the market was going to start recovering. However, no one can time the market. Therefore, the best long-term strategy would have been to hold onto your stocks and even bought more during recessionary periods to take advantage of the rebounds. By purchasing more stocks during recessions, you would have bought them at a discount and your gains would have multiplied during the subsequent bull market. The key here is to buy high-quality stocks or diversified exchanged-traded funds. If you spent all your money on risky, volatile and cash flow negative companies, you may actually lose all your money during the recession. Those companies may not have survived a tough market environment. On the other hand, if you spend your money on strong, profitable companies or diversified exchange-traded funds, you would have been fine during the recession. Then, the subsequent bull market may turn you into a wealthy person.
Throughout history, rebounds in the stock market have always occurred. If they don’t occur, then we probably have bigger issues to worry about then our stocks. Perhaps there is a zombie apocalypse happening or a meteor that’s going to destroy our planet in the near future.
Also, notice that the recessionary periods are much shorter than the inflationary periods. This should give you further confidence that recessions always end and lead the way to more prosperous times.
It seems that the markets have gotten more volatile in recent years. From 1980 onwards, you’ll notice much more drastic swings in the market. Whether that is due to high-frequency trading computers, more liquid markets or more investor anxiety, I don’t know. However, you can certainly take advantage. When markets fall, they fall hard. However, when they rebound, they shoot up. These things happen much faster now. Therefore, it would be wise to purchase even more aggressively when the stock markets have taken a hit.
One way to protect yourself from recessionary periods is to own more high-quality dividend stocks. High-quality dividend payers will continue to pay out dividends regardless of what’s happening in the market and how its stock price is performing. In fact, when a dividend stock has gone down in price, it is an even better purchase because you’ll receive the same dividend payout with a smaller investment. Having a large portfolio of high-quality dividend paying stocks will allow you to generate a consistent income regardless of where the market is headed.
Another strategy you can take to protect yourself during recessionary periods is to consider other types of assets. Perhaps you can invest money into bonds, CDs, real estate, gold, and other commodities. If you manage your own properties, you can still collect a stable flow of rental income since people will always need a place to live. Real estate values also tend to be more regional so you may not lose much during a stock market crash.
When people are running away from stocks, they tend to find other investments to put their money in. Having a small part of your portfolio in other types of assets may bring you some added stability and consistent cash flow to minimize your heartburn.
Continue to Save
Just because the markets are tanking doesn’t mean you should stop saving money. You never know when you can lose your job or incur a huge one-time expense. Therefore, continue to sock aside money and build up your wealth. Continue to invest in diversified assets that you feel comfortable with. Whatever you do, do not waste all your money on material things that don’t bring much value to your life.
Have you taken steps to protect yourself from the next recession?
Professional Development and Personal Finance Blog