Forecasts of a recession are piling up. Some forecasts show a recession in 2022 or 2023. At the same time, some show a moderate recession, not a deep one. More optimistic forecasts do not show any recession. With many conflicting opinions, investors are likely to wonder how to invest during a recession.
The logical first step to investing in a recession is to know what a recession really is. A group of experts has determined the recession in the United States at the National Bureau of Economic Research (NBER). Although the recession is in the hands of the panel, they provide some guidance for their thinking. According to the NBER website, the recession is:
A significant decline in economic activity has spread throughout the economy, lasting more than a few months, usually visible in real GDP, real income, employment, industrial production and wholesale and retail sales.
There have been many recessions in the United States over the years. Different things challenged each and each was different in severity. However, the stock market is never happy during a recession.
The good news is that the US economy is recovering from every recession in its history. At the same time, the stock market is also recovering from any recession. The bad news is that it is almost impossible to determine the time on the market. Instead, investors may want to try investment strategies that focus on market time.
How to invest in a recession in 2022: averaging down
Adhering to an investment strategy may be better than trying to get out of stocks and get back in on time. The stock market can be unpredictable and a lack of stock recovery can lead to poor returns.
What’s worse is that investing when stocks are broken can be scary. Emotions such as panic can make investors make bad investment decisions. Even in good times for stocks, joy can make investors feel more comfortable than they should. To get the psychology out of investing, choose an investment strategy and stick to it forever!
Downward averaging can be a great way to invest during a recession. For example, let’s say you bought a share for $ 100. Then came the recession and the stock fell to $ 50. You got an average if you can swallow your pride and buy another share for $ 50.
You now have two shares with a total value of $ 150 ($ 100 for the first share and $ 50 for the second). The average value of both shares is $ 75 ($ 150 divided into two shares). If the recession is over and the stock price returns to $ 100, you have improved your return.
Once the shares are refunded, you will have $ 200 ($ 100 per two shares). Since you have invested only $ 150, your return is 33% ($ 50 profit divided by $ 150 investment. If you did not make an average, you would only hold your original stock of $ 100, which is refunded to $ 100. Your return will be 0% ( $ 0 profit divided by $ 100 investment.
How to invest during a recession: averaging costs in dollars
Another strategy to eliminate speculation from investing during a recession is to average costs in dollars. You may be averaged on the price of dollars in your 401 (k) and not even know it.
Averaging costs in dollars is when an investor regularly buys stocks of shares, mutual funds or ETFs (such as weekly, monthly or quarterly). The other part of the strategy is to choose your investments and stick to them in any environment, recession or not.
Here’s an example of how to invest during a recession using dollar averaging. Let’s say you make a regular investment of $ 100 and buy a share of the S&P 500 index. Then there is a recession and the index drops to $ 50. With your next $ 100 investment, you get two shares.
You now have three shares worth a total of $ 150. Then the recession ends and stocks recover to $ 100 each. For your third $ 100 investment, you will buy another $ 100 share. At this point, you will have a profit of $ 0 from your first and third investments and $ 100 from the second investment ($ 50 profit from two shares).
Your return will be 33% ($ 100 profit divided by three regular investments of $ 100). Meanwhile, the S&P 500 would return 0%.
Is it a good idea to invest during a recession?
Stock markets have always recovered from recessions. In addition, predicting the end of the recession and the bottom of the stock market is virtually impossible. So setting market times during a recession is not a good strategy.
Instead, investors may be wiser to choose an investment strategy that eliminates speculation. In addition, investing during a recession can be a mental torment when you watch your bills shrink. Your investment strategy should also take your emotions out of your investment strategy during a recession.
Two recession stocks
Dollar tree (Nasdaq: DLTR) and The Coca-Cola Company (NYSE: KO) are two recession stocks. Both companies sell basic consumer products. In other words, customers tend to buy products from companies during a recession.
Dollar Tree is one of the largest retailers in the United States. Dollar Tree sells daily necessities such as soap, garbage bags, detergents, milk, eggs and more. Customers return to Dollar Tree again and again for these items. Shares have risen more than 6% this year compared to the negative 23% for the S&P 500 index. Dollar Tree shares have a P / E ratio of 23x.
Coca-Cola sells the world-famous soda that everyone loves. During a recession, when money is limited for Coca-Cola customers, they may waive other expenses before deciding to cut Coca-Cola from their budget. Shares have risen less than 1% this year, but are ahead of the S&P 500 index. Cola-Cola shares are paying a 3% dividend.
BJ Cook is a long-time stock maniac. He has held several roles in the world of capital research and won the right to use the CFA designation in 2014. When not writing for Investment U, you can find him looking for new investment ideas. Outside of the investment community, BJ is a staunch Cubs fan.