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Investing Before A Recession: Is It Wise To Stop?

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Forge Your Wealth is meant for education and entertainment and should not be used for financial advice.

In a previous post I mentioned that one of the main keys to investing is to buy low and sell high. But is that always the case? Some believe that is the case now with a potential upcoming recession. That does make sense based off this rule alone. Recessions tend to happen after an all-time high, which the stock market recently hit, and there are signs of an upcoming recession. That alone makes sense. So is it wise to stop investing before a recession? Absolutely not and I will explain why.

No One Can Time The Market

I said it many times before and I will keep saying it until everyone stops trying to time the market. You cannot time the market, anyone who can will be a multi-trillionaire. Even Warren Buffet, the wizard of the stock market cannot time everything right, case and point he is less than a percent of the way to being a multi-trillionaire.

While trying to sell high and buy low is important when trying to maximize your returns, it is far from the main driver in growing your investments. The main key is to hold your investments. Markets will rebound.

Markets Will Rebound

Think about these words for a minute. Markets will rebound. While the markets may be due for a recession they are almost due for rebounds. For all you or anyone else knows, a recession is either no where in the future, or has already happened in the past. Even the “economy experts” claim there is only a chance that the economy will go into recession. If you stop investing before a “recession” you could miss out on potential gains.

What Should You Invest In

Special Note

Although you should continue investing before and especially during a recession, you should note that you should not invest money you cannot afford to go without. If you do not have money to invest, you do not have money to invest. Unfortunately, recessions are times of income shock and naturally people will have less free money to invest. There is no shame in admitting that you are slowing down on investments or even have no money to invest, just as long as your expenses are only for what you need to use. More importantly, you should not invest money you could see being used in less than 5 years, maybe even 10 to allow the market to turn around. A retirement fund is a great place to invest if retirement is not on the horizon.

My Preference: A Balanced Fund

Although you should continue investing before a recession, you should try to find more defensive investments. My defensive investment includes a balanced fund in which includes stocks (domestic and international) and bonds. The bonds help allocate the risk so if the market takes a hit my fund should not take as much of a hit while the stocks will allow it to grow faster than bonds alone if the market keeps climbing. Furthermore, the international equities help provide growth from various markets so if one market suffers, others could grow.

These funds offer a balance between a fund based purely on equity or stocks and a fund based on bonds. I like them because they are lower risk than stocks alone, yet they provide dividends which I have not really seen in bonds. There are relatively few bonds that have dividends with exceptions to some long-term and high risk bonds. I do aim more towards investing in higher dividends which I have explained previously, but I may write a post about why I lean towards dividends.

Bonds

Some people find bonds to be safer investments as the money is invested to pay debts, not equities. There are gains in bonds, even arguably great gains, but not as much as stocks. An article from The Balance shows how over time, history shows stocks frequently outperform bonds. Truth is investing too much in bonds may easily make you lose out on the amazing gains in stocks. That does not mean that bonds should not be invested in, but you should not switch entirely to investing in bonds much less reallocate completely to bonds. Bonds are good investments, but I do not see them as sole investments but tools to balance risk.

Commodities

Commodities, much like bonds can be useful tools to balance risk, but the problem with commodities is that the only time they increase is during times of turmoil. That is because people feel commodities are fall backs in case the economy turns south. I have previously brought up why I do not share the same views as others about owning commodities, but I will share with you a more practical reason that commodities should never be a sole investment.

Many try to buy commodities during troublesome times like when people believe a recession is coming. Many people can sell their investments and invest in commodities. But what if the market recovers and everyone else sells their commodities before you do? The commodities will lower in value, and they will only increase during another time of turmoil. I do not know many commodities that pay dividends so there is little chance of growth when the market grows.

Your Own Business

If your business is picking up and the debt to income ratio is decent, you could invest money further into your business. What exactly you should invest in for your business? Truth is, this depends on the circumstances of your business and the type of business. As the entrepreneur, you yourself should determine how to invest in your business.

That being said there are many aspects in practically every business that could seem as worthwhile to invest in before and during a recession and some aspects that are not. The infographic below will exhibit what I am talking about. I must express that you should consult experts in where you should invest with your business and I am not one of them.

Real Estate

Real estate, though risky is something everyone needs. Remember, the three basic needs are food, water, and shelter. However, real estate is not recession-proof and there is no single real estate that will work in every situation or location.

During a recession some people may lose their homes. This is opportune to buy some properties. You may need to adjust based off the situation.

Single Stocks

I have invested in some single stocks this year. Like real estate, no company is recession proof, in fact, with the market as global as it is I all but guarantee that there will be decreases. The question is how far can the stock go down and does it provide products or services that will be in demand during the recession. Even when it goes down, (not if, when) a well bought stock can easily rebound.

Final Thoughts

You should be investing at all times. But you can and should change what you invest in during a recession. Lowering your risk tolerance may be a good way to go to allocate your investments. But more importantly, it will mentally prepare you to prevent financially unwise decisions. When the recession hit in 2008, many people pulled their retirement funds out, and they have been paying for that decision ever since. A set of circumstances and a bad decision can permanently affect your financial future. So do not switch your assets too much and just buy assets with different risks.

You need to keep investing before and during a recession. Knowing that investing during a recession is opportunistic and realizing the extent of your risk tolerance can help you to forge your wealth.

Author: Papa Foxtrot

Most of my life I was careful with money and learned where I should invest it. I was very lucky to have parents who taught me financial literacy when I was young. Unfortunately, I am very lucky because many people lack the financial literacy I know. The purpose of Forge Your Wealth is to teach people who are just starting out in life how to obtain their wealth or anyone who just realized they may need to learn more to handle their finances. I currently have a PhD in biochemistry, just started a job in industry (will not disclose where exactly for personal and professional reasons) and am currently married to the love of my life. I am one of the lucky few people in America who graduated with no student debts, my wife was not. Over the series of a little over 3 years we paid for our wedding with no debt and paid off her federal student loans.

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