Should Young Investors Buy Stocks During a Recession?

Many assets, like stocks, fall to cheap levels when the world is in a global recession.

Depending on your age and investment holding period, recessions can provide a fantastic opportunity to buy stocks at reasonable prices.

It is smart for most young investors to buy stocks during a recession, but it may not be a great idea if you are close to retiring.

Since young investors can hold their investments for a long time, buying stocks during a recession provides an excellent risk to reward.

Is it smart to buy stocks during a recession?

It is an excellent idea for long-term investors to buy stocks during a recession.

While you are getting stocks for a reasonable price, there is a good chance they will continue to fall as you buy them.

Many investors say they will wait for stocks to fall further before buying but never pull the trigger before the next bull market starts.

It is nearly impossible to buy stocks at the bottom, so dollar-cost averaging into the market over time is a solid idea.

You don’t have to worry about missing the bottom or trying to buy in at the perfect time by contributing to your investments consistently over time.

Should I sell stocks before a recession?

In a perfect world, investors could sell their stocks before they crash and repurchase them at the bottom, but there are a few problems with this idea in reality.

For one, if you sell your stocks at a profit, you will be taxed on the gains. However, long-term investors can reduce their taxes if they hold their stocks for long periods of time.

Additionally, it is nearly impossible to time the stock market with precision. In hindsight, it seems easy to sell high and buy low, but it is much more difficult.

When you try to sell the top, there is a good chance you will sell too early or miss the top and sell too late.

Additionally, when you try to repurchase your investments at the bottom, you can easily miss it and either buy before the bottom or miss the lows completely.

Timing the market requires you to be right TWICE.

First, when to sell.

Second, when to buy back in.

99% of the time that’s a losing battle.

What is the best investment during a recession? (ETFs)

Many companies are susceptible to going bankrupt and losing business in a recession.

Therefore, investing in an ETF that invests in a diversified basket of great companies is an excellent way to gain exposure to stocks in a recession.

ETFs are the safest investment in a recession because if one of the holdings goes bankrupt, it will simply get moved from the fund and replaced with a better company.

Additionally, historically, the overall market and ETFs always recover from drawdowns, while many single companies don’t.

What should I do to prepare myself for a recession?

During recessions, there are various ways you can prepare yourself financially to avoid dipping into your investment accounts.

If you schedule your finance appropriately, you should be able to avoid selling your investments and, ideally, contribute more to them.

Additionally, you can find ways to increase your income by learning a new valuable skill online. Even without a job, you can make money doing freelance work if you know practical skills.

Emergency fund

Having an emergency fund is always a solid idea, especially in a recession. You never know if you will lose your job or have to front an unexpected expense.

Budget

Sticking to a strict budget is another way to improve your financial health during a recession. If you avoid spending money on unnecessary goods, you can invest more and grow your investment portfolio.

Diversify your income

Creating multiple income streams is a fantastic way to ensure you always have cash flow. For example, if you lose your job, having other income streams allows you to continue generating income and investing in assets.

How long do recessions generally last?

According to Forbes, recessions generally last anywhere from 10-18 months. However, it depends on the situation because the Covid-19 recession lasted only from February to April 2020.

When you invest in the stock market, your holding period should be at least ten years to ensure you don’t lose money.

If you invested in the S&P 500 in 1999, you would not end up breaking even until 10+ years later, so you must understand the risks of the stock market and plan to be a long-term investor.

Beginning your investment journey during a recession is ideal since you can purchase stocks at a discount and avoid the market pullback existing investors face.

Trying to time the market as an investor is never a good idea. However, if you are holding cash during a recession, your odds of making money in the stock market are higher since you can buy stocks at reasonable prices.