How to Invest in a Recession

Written by: Lindsey Boycott

On Friday, the S&P 500 fell a further 2% amid a sell-off, putting the market down over 10% for the week. Stocks in Europe and Africa also fell. Overall, there was a $6 trillion loss in the global market, which is a stark contrast from a market high a week ago. The week is on track to be the worst week since the 2008 U.S. economic recession and global financial crisis.

After Germany and the United States reported cases of new patients infected with Covid-19 that had no known connection to others with the illness, the S&P 500 fell more than 4.4% on Thursday on the single worst day since 2011. Investors are particularly worried about supply chain disruptions due to a slowing economy in China. Supply problems are more difficult to ease with monetary policy from central banks such as the U.S. Federal Reserve, which typically deploy low interest rate environments in order to increase demand. But as market watchers point out, this is not necessarily a demand problem. As a result, companies are slashing their earnings estimates for example, Bank of America (NYSE: BAC) cut their GDP estimates to 2.8% globally down from 3.1%, which are disconcerting numbers for the markets.

Recession fears fuel sell-off

Worried investors might be asking themselves if they should sell. Warren Buffett does not think so, and has always stated that investors should not invest based on today’s headlines. Generally, when there’s a slowdown or a recession, investors tend to move away from equity funds and move toward fixed income. While fixed income assets such as bonds and other conservative investments are safe havens, they are not an attractive option if investors are looking for long-term growth.

What to do?

While investing in bonds can be a safe move, there’s room to consider diversifying portfolios rather than a mass sell-off. Further, trying to time the market by selling equities, putting everything in bonds, and then watching for when you should start buying again, is risky.

A better strategy is to have a diversified mutual fund portfolio that includes stock and bond funds, which provide market growth with stock funds, but also the safety of bond funds. Federal bond funds made of U.S. Treasury Bonds are the safest, backed by the U.S. government. Other bond funds to look at are municipal bond funds issued by state and local governments as they are also considered relatively safe. Taxable bond funds issued by corporations offer higher yields than government-backed options, but do carry more risk.

To keep your money working for you in the equities market, mutual funds focused on dividends can give higher returns with less volatility as they are not solely focused on growth. Similarly, large-cap funds, such as those that include blue chip stocks, are less vulnerable to market fluctuations than funds that are invested in smaller, albeit more exciting, companies.

A portfolio with a mix of bond and equity funds, even in a recession, can weather economic storms more successfully than trying to time the market.

Related: Finding Value with Bubble Charts

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