Have you just found yourself on the wrong end of an economic downturn frantically googling “Investing during a recession” or “How to invest in a recession?” Well. Lucky for you it’s really easy! So don’t stress and read on.
You might already know that economic downturns are a good time to buy stocks or even investment properties at a discount.
But how do you actually make it happen? Markets are hard to time and no one really knows what to do until it’s too late.
So if you’re just coming across this, take it as a sign. I’ll give you an action plan to make recessions a breeze.
Today I’ll teach you:
- Special recession techniques to free up some cash for investing
- How to avoid emotional decisions in times of uncertainty
- What I’ll be investing in
- A zany infographic to seal the deal (and save for later)
5 Steps to Successful Investing During a Recession
Step 1 – Refinance everything you own
As a general rule, during an economic downturn, interest rates plummet lower than a chubby bungee jumper. And that’s for good reason.
The central banks have two super-tools to help fend off recessions:
- Lower interest rates to encourage people to take on loans and spend money
- Buy debt to encourage banks to take on more debt and hand out loans.
(Actually, they have more options up their sleeves, but this is the idea. Macroeconomics gets complicated if you get too deep in the weeds.)
What does this mean for you?
It means you can take advantage of the low-interest rates by refinancing your debt. Your mortgage, your student debt, whatever. It all helps you lower your monthly expenses.
How does this help us with investing during a recession?
- Short term: Free up more money to invest. (We’ll get to that.)
- Long-term: Locks into a sweet interest rate you can’t get five years from now.
If you drop your interest rate by just 1% (say from 4% to 3%) on a $200,000 mortgage, you’ll have an extra hundred bucks in your pocket every month, AND save over $40,000 over a 30-year term!
Action Plan: Refinance your mortgage and student loans to take advantage of the new low rates.
– CommonBond for student loans. $500 cash bonus (to invest!) and they pay for a kid’s education…spread some love in a painful time.
– Credible for competitive mortgage quotes.
Step 2: Change your mindset – you’re getting a bargain!
Get a hold of yourself.
If you read the news during any recession, it will feel like life is ending. No one knows how bad it’s going to get, and the pundits seem to get a rise out of inciting panic. Is it one-quarter, two-quarters? Maybe it’s four-quarters of losses. Ahhhh. No one knows anything, and everyone is freaking out.
The world isn’t ending though.
Yes. Your portfolio will tank. But it’s too late. It’s done, gone, and behind you. Move on.
Properly investing during a recession means you have to forget where you were and focus on where you are now so that you can make the best move with what’s in front of you.
…if something changes…You move from having a slight advantage to slight disadvantage but you’re emotionally still connected or attached to having the slight advantage. …What’s going to happen then is that you’re going to suddenly reject positions that you should accept, and you’re going to stretch for positions – for valuations – that you can’t really reach, and you’re going to fall into a downward spiral. So that’s the onset of a cognitive bias. In that case, the cognitive bias would relate to the emotional clinging of past evaluation.– Josh Waitzkin – Chess Grandmaster turned business advisor
Let’s face reality. If you buy something now that has long-term value (not companies that go bankrupt or houses in dying cities) the price will come back.
Just have a look. Everything always comes back.
That means that everything you buy today is at a discount compared to how it will look in a few years.
That’s an important mindset shift.
Yes, you lost money. That sucks. But now you can dust yourself off and get back in, and probably make more than what you lost.
In general, we’re more sensitive to loss than we are to gain. If your portfolio goes up 10%, you’ll barely notice. If it goes down 10%, and it sets off alarm bells in your head.
“ A person who has not made peace with his losses is likely to accept gambles that would be unacceptable to him otherwise.”― Daniel Kahneman
(This guy knows a thing or two about alarm bells. It’s known as loss aversion and Daniel Kahneman won the 2002 Nobel prize in economics for it.)
So instead of focusing on what you lost or what you could have had, think about what a discount you’re getting now compared to 3 years from now.
50% discount? Nice! 40% discount? I’ll take that too.
You have to think of investing during a recession as a good deal regardless of the deal you could have had. That’s the key to keeping your sanity.
As a bonus, don’t freak out too much if the market rebounds a bit before you take action. So you got in after a 5% jump. Oh well. You still got a hefty discount. Good find!
Action Plan: Stop worrying about what money you had or what you missed. Focus on the best move you can make today.
Step 3 – Don’t rush it
Panic can go two ways when investing during a recession.
- Some people panic and start selling everything they can touch.
- Others start panic-buying for fear of missing out and try to get into the market as fast as they can.
Take a breather.
If you don’t know how to invest at all…start here.
Downturns last months to years. In the big picture, you’re still going to win regardless of the day or month you get in.
So spread out the days you get in. Invest in 5 parts to avoid feeling too bone-headed later from one mistake.
Action plan: Take it slow. When you start buying in, do it in five-chunks just to lower the stress on any one decision.
Step 4 – Tighten your belt
Belt-tightening is no fun. (Unless you just got off a Jenny Craig diet.) But hey. Stocks and houses are on a blowout sale during recessions, so saving up for them is worthwhile. Picture your goals and be happy.
Every dollar you invest now will become two dollars pretty soon if what you buy is on a 50% discount.
Cancel services you can live without. Cancel travel plans. Refinance. Downgrade your car. And stop going out to eat!
This helps when investing during a recession because every dollar you save now will double soon. So don’t take that $5,000 vacation now. Take TWO vacations in a few years!
Action Plan: Assess every cost you can remove in the short term. That money is better spent elsewhere!
Step 5 – Move into stocks but stay liquid with indexes
Okay, so I’m not the first person to tell you to move into equities when investing during a recession. I go 100% equities when I see a recession (- excluding my emergency fund) but it’s important to keep liquid even as you start buying into discounted stocks and houses.
Why stay liquid?
You do need money.
- If you were to lose your job, now would be the time
- Tenants would be evicted now if ever
- Don’t forget about normal life too! Car parts and broken legs, who knows!
You won’t sleep at night if you are having money problems. Even though you just bought everything at a discount, let’s not get too aggressive.
I deal with this by only buying stock indexes (I love my indexes) until I know that my income is safe, my tenants are staying put, and some sanity returns to the world.
Indexes move slower than almost any specific stock pick and you could always sell them to pay your bill if you really really had to.
If you make a bad bet and can no longer pay your bills. That’s trouble.
Housing can have attractive deals during a downturn (I do love housing) but it moves slower than stocks. So you can have some time, and can still get in on foreclosures or cheap houses months or even years after stock markets are recovering.
Take your time.
Action Plan: Buy indexes until you are safe from job/tenant loss.
Really I recommend always buying indexes, but especially during a downturn.
Maybe a picture will help it sink in
TL;DR – Investing during a recession
- Free up cash flow for investing – Refinance and tighten your belt
- Don’t get emotional with “what could have been” when it comes to investing. Focus on what you have now – and that’s a good discount!
- Stay liquid with indexes while the times are bumpy. Just in case.
So what about you? Did a recession ever send you into panic mode, and what’s your go-to investment strategy?