When people figure out that the stock market is crashing, their first instinct is to take out their money and hide. Well if you’re 80+ years old and if you need the money NOW, then maybe that’s what you should do.
But if you are reading this blog you are likely a working young professional, which means your 2020 recession investing strategy is going to look completely different!
In this article, I will share with you how to invest in a recession in 2020.
What is a Recession
First of all, what is a recession? According to “The Balance.com” a recession is a significant decline in economic activity.” Economic activity consists of just about any selling or spending! Even your last shopping trip to the mall to buy some clothes is considered economic activity.
CAUSE OF THE 2020 RECESSION
So basically a recession occurs when people are selling and buying less, because there is less money to stimulate the economy. As you probably know, the major factor for our current recession is the COVID-19 virus. People are scared to travel and boarders are closing around the world. In addition, some people are reluctant to invest their money being the future is unknown. This leads to less spending and money in our economy, which produces a recession.
HOW TO INVEST IN A RECESSION?
So how does investing in a recession impact you investing strategy? Well there are a lot of factors that change due to a recession, but the major change is that the value of the stock market decreases!
Lets use the S&P 500 as an example. The S&P 500 is an index which is a collection of the top 500 largest companies’ in the U.S. It would include stocks like Apple, Google, and Microsoft. The S&P 500 acts as a good benchmark to determine the health of the overall stock market.
Lets say you wanted to buy 3 ETFs (Exchange Traded Funds) of the S&P in February 2020. In February the an ETF of the S&P was worth $350. Therefore to buy 3 ETFs of the S&P, you would need to spend a total of $1050 (350*3).
In comparison, if you were to invest after the March 2020 market crash. In March 2020, one ETF of the S&P was selling for approximately $250. That means you would only need to spend $750 (3*250) to buy the SAME number of ETFs in February.
BENEFITS OF INVESTING IN A RECESSION:
As you can see there are some benefits of investing in a recession. The first benefit is that you can purchase shares at a lower price as shown in the example above. Although your investments may not be worth a lot today, in the future the market ALWAYS recovers. The market is cyclical and recessions and booms are normal phases of our economy. Historically over the long-run there is about a 7% average market return.
BUT, TREAD CAUTIOUSLY:
You may think great! I’m just going to use all my savings and invest in the stock market while we are in a recession and things are cheap. But, no one really knows if this is the end of the recession or just the beginning. So far, the value of the S&P dropped to the price it was in Jan 2019. However, in the next months depending on endless circumstances, our economy can either recover, stay stagnant, or drop even further.
If you invest all of your savings now, and the market continues to drop you did not luck out. But if the market recovers, and you invested while it was low than you will receive greater returns on your investment.
This is often why investing is like gambling because you don’t know what the future holds. But, as a passive investor you shouldn’t look at the short-terms. The things you do know is that over the long-term you will make a 7% average return. Therefore, invest to achieve your long-term goals, rather than making a quick buck in the short-term.
Key Takeaways:
- Your investing strategy in the 2020 recession should be to consider the long-term. Although your first instinct is to sell and hide, this is the time to buy and hold.
- Don’t try to time the market, because no one can predict the future
- This is NOT the end of the world. The market is cyclical and it will recover eventually and you will likely receive a 7% average annual return in the long-term.
- You future self will thank you for it. Recessions don’t happen too often, so the least you can do is to take advantage of it.
Hope you learnt a bit on how to invest in a recession. Stay safe everyone and wash your hands and self-isolate 😀 ~~~
Leave any questions or concerns about investing in the 2020 recession in the comments below.
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