Should You Invest If a Recession Is Looming?
“I'm aware that the market has been performing really poorly this year- do you still think it's a good time to invest?”
That was an excerpt from a message one of my clients sent me last week. Since then, I've had several others reach out with the same questions. All of these clients are investing on weekly or biweekly planned investment schedules. Some of them wondered if they should reduce or stop their contributions and others were wondering if they should dump extra money in or increase contributions. All because of the same information they're all hearing in the media.
I asked all of them the same question: has your goal for the money changed?
It's tempting to think that just because you're hearing increased chatter about market volatility you should change your strategy, but if your strategy and goals haven't changed, I'd say that's never the case. Every single investment strategy- stock market or not- factors in expected volatility and variability. Whether you're buying a stock or a mutual fund, purchasing a house, or buying a business, the expectation is always that things can go up, down or sideways. Of course, the hope and expectation is that over some time period, you will benefit from some kind of returns that made the risk worth it.
Not one of the clients who reached out about funding changes had any changes in their goals or personal financial situations so after doing my due diligence and talking through what they were thinking to make sure there wasn't something else driving the initial question, my answer to every single one was the same: stay the course. Here's why:
- On 6 of the last 10 trading days, the market has gone up or down by 1% or more. On three of those days, the market was down over 2%. It's been a pretty bumpy ride. It's been a pretty bumpy ride. In times like these, people tend to get curious (at best) or worried (at worst) because the uncertainty seems to be so high. The truth is that uncertainty is always high. It's valuable to remember that volatility was expected at the outset and that even though you didn't know the timing and extent of the current dips in advance, they're part of a larger overall picture that is designed for long term growth and sustainability.
- One thing that is fairly certain? The best investment strategy is to buy low and sell high, and doing so is impossible to do if you only buy when you believe the market is trending up. The best thing you can do is to buy consistently so that even if you sometimes buy high, the odds are that you'll buy low too.
- I don't believe we're on the brink of a recession because there is just too much economic good news right now, but if we were, my recommendation to invest would be stronger. Why? See the last bullet about buying low and selling high. We've been in a bull market for years, and a market correction is the perfect time to lower the cost per share in your portfolio. Yes, it's painful to see your existing nest egg in the red BUT if you're using current cashflow to invest as the market bottoms out, those dollars invested at a lower cost than some of your current portfolio holdings will likely see the most gains when the market rebounds. That is true whether the market takes 6 months or 6 years to bounce back.
It's important to remember that no matter your age, in order to be financially optimized you need to have long term money invested and working hard for you. Only you know what you can afford to invest for the long term versus what you need now, and whatever that is should continue to be invested in a diversified portfolio EVEN if the market continues on this rollercoaster and especially if we end up in another recession. In times like these, it can also be helpful to look at the underlying data. It's easy to get swept up in doom and gloom headlines, and based on the recent stock market ups and downs it looks like that's exactly what's happening to many investors. Listening to news stories speculating about an impending recession, harping on about the negative impact of the Fed increasing interest rates and resulting inflation has many investors jumping in and out of the market out of fear, which is the real driver behind the recent poor performance.
But what's actually going on with the economy?
The data says that people and businesses are actually doing incredibly well financially. Consumer debt is near multi-decade lows, average homebuyer credit scores are around 750, wages are up and unemployment is down. Per J.P Morgan‘s guide to the markets, businesses are doing particularly well too as corporate profit margins are near multi-decade highs, corporate spending is up, and dividends and share buybacks at all time highs. If you want a more fun run-down of this year's good news, this medium piece more casually reinforces these sentiments. The spikes and dips in the market don't match the reality of what's actually happening, and it seems like a really weird starting point for the recession the media thinks is looming.
Why does that matter?
Because if your fear is that you're going to invest money today and it will be gone tomorrow, I believe that's highly unlikely.
Either way, whether or not a recession is on our doorstep, dips in the market are an opportunity. And if you choose to sit on the sidelines out of fear rather than investing whatever percentage of your weekly revenue you can afford to pretend doesn't exist and put to work for you, you'll miss out on the opportunity to build a truly passive income stream that can be used to fund your future goals.