Should you stop investing in a recession? | Smart Change: Personal Finances

(Maurie Backmann)

Are we on the verge of a recession? Or are we already in one? It’s a bit blurry.

Technically, two consecutive quarterly declines in gross domestic product can indicate a recession, and we have reached that threshold. But when we look at the most recent jobs data, it’s clear the economy is still strong.

But we don’t know how long it will last. The Federal Reserve is aggressively raising interest rates in an effort to slow the pace of inflation. If it achieves the soft landing it hopes for, consumers could be relieved in the coming months.

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But if consumers stop spending to an extreme degree in the wake of higher borrowing costs, it could trigger a recession. And it is important to be prepared for this possibility.

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You may be wondering if you should stop investing in a recession. But while you might think it’s a bad idea to invest during a recession, the opposite might be true.

Stick to your plans

First, let’s eliminate one thing. The performance of the stock market does not always match that of the economy as a whole. In 2020, after briefly dipping into bearish territory, the stock market rallied despite some of the worst national unemployment numbers on record. And so, if a recession sets in, it won’t necessarily drive down the value of stocks.

But even so, there’s no reason to stop investing if you can afford it just because a recession is coming. If you’re worried about your job and not confident about your savings, you may want to focus on consolidating 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 cash to pay for three full months of essential expenses.) But if you’re willing to save, then it’s better to keep investing the money. you don’t need living expenses.

No matter what goal you’re investing for, be it retirement or something else, the more time you give your money to grow, the more wealth you’re likely to accumulate. And so pushing yourself to invest during a recession could mean setting yourself up for more financial security down the line.

Moreover, if stock market values do tumble in conjunction with a recession, giving you the opportunity to stock up on quality investments at lower cost. This is an opportunity that could pay off if you hold your investments for many years before selling them.

All in all, if you’ve been investing consistently so far, there’s no reason to change your behavior if economic conditions deteriorate. Although the thought of a recession may be scary, in practice things may not be so bad. In fact, some recessions are short-lived, so even if things get worse later this year or early next year, there’s a good chance the economy will manage to rebound fairly quickly given its strong point. departure.

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