Should You Stop Investing if a Recession Hits?
Are we on the verge of a recession? Or are we in one already? It’s sort of unclear.
Technically, two consecutive quarterly declines in gross domestic product can indicate a recession, and we’ve hit that threshold. But when we look at the most recent jobs data, it’s clear that the economy is still holding strong.
But we don’t know how long it will hang on. The Federal Reserve is aggressively raising interest rates in an effort to slow the pace of inflation. If it achieves the soft landing it’s hoping for, consumers could, in the coming months, be in for a world of relief.
But if consumers halt their spending to an extreme degree in the wake of higher borrowing costs, it could spur a recession. And it’s important to prepare for that possibility.
You may be wondering if you should stop investing if a recession does indeed hit. But while you might think it’s a bad idea to invest during a recession, the opposite might hold true.
Stick to your plans
First, let’s get one thing out of the way. The stock market’s performance doesn’t always correlate to that of the broad economy. In 2020, after plunging into bear market territory briefly, the stock market rallied despite some of the worst national unemployment numbers on record. And so if a recession does take hold, it won’t necessarily drive stock values downward.
But even so, there’s no reason to stop investing if you can afford to simply because a recession arrives. If you’re worried about your job, and you’re not confident in your savings, then you may want to focus on shoring up your emergency cash reserves before pumping more money into a brokerage account. (You should especially consider going this route if you don’t have at least enough money in cash to pay for three full months of essential living expenses.) But if you’re all set savings-wise, then it pays to continue investing money you don’t need for living expenses.
No matter what goal you’re investing for, whether it’s retirement or something else, the more time you give your money to grow, the more wealth you’re apt to accumulate. And so pushing yourself to invest during a recession could mean setting yourself up for more financial security down the line.
Plus, if stock values do tumble in conjunction with a recession, that will give you a chance to load up on quality investments at a lower cost. That’s an opportunity that could pay off if you hold your investments for many years before selling them.
All told, if you’ve been investing consistently to date, there’s no reason to change your behavior if economic conditions worsen. While the idea of a recession can be scary, in practice, things may not be so bad. In fact, some recessions are fairly short-lived, so even if things do take a turn for the worse later this year or early next, there’s a good chance the economy will manage to bounce back fairly quickly given its solid starting point.
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