The Key to Investing Successfully When Recession Hits (or Even if it Doesn’t)
Are we headed into a recession? If we are, what can investors do to keep their money safe?
With the Federal Reserve cutting interest rates for the first time since the financial crisis (with more cuts potentially on the horizon), the ongoing trade war between the U.S. and China, and the increase of volatility in the stock market, many people are legitimately nervous about what the near-term future holds for the economy and their investment portfolios.
If you look at a chart of the S&P 500 over the past month, it looks a lot like a roller coaster.
You may be tempted to pull all of your money out of the market and wait for smoother days. But here’s the thing about roller coasters:You don’t jump off the ride just because there are ups and downs.
Big drops are part of the experience. Whether recession is right around the corner or in the distant future, it’s helpful to prepare yourself in advance. That way you’ll be ready whenever it shows up.
Preparation is the Name of the Game
The effectiveness of your preparation may depend on this one fact more than any other:
What YOU Do Matters Much More That What The Market Does. It’s a deceptively simple statement, but it contains a powerful truth. The stock market will rise and fall. You can’t control that (you can’t predict it, either).
As an investor, you must focus on what you can control. The one thing you can truly control is your own behavior. This is good news because your decisions have a much greater impact on your investing success how the market performs… or anything else for that matter.
Case in point:
The percentage of your income you invest matters more than the percentage return you get from your investments. To illustrate this, let’s say you earn $35,000 per year and you decide to invest 1% of your income for 30 years. Let’s say the market delivers a solid 10% gain every year. After 30 years, you’d have about $57,000.
Now let’s flip it. Let’s say you decide to invest 10% of your income and the market returns an impossibly low 1% annually. You’d still end up with about $121,000 — more than twice as much as in the first scenario.
See how that works?
Your decision about how much you want to invest far outweighs market performance when it comes to building wealth.
That’s Why Planning Is So Important… No one knows for sure what the stock market’s going to do next. But you do know that the market trends higher over the long term.
Studies show that, in general, the more buying and selling investors do, the worse their portfolios perform. Studies also show that emotionally-driven investing decisions tend to do more harm than good. You may have already been aware of these findings. If you didn’t know about them before today, now you’re up to speed.
Based on these facts, here 4 critical pieces to include in your plan going forward — recession or not:
- Get started sooner rather than later. The more time you give yourself to save, invest and allow compounding returns to work, the faster your money is able to grow.
Trying to “time the market” is a major mistake that hurts countless investor’s profitability. Getting in the game is more important than getting the timing exactly right. Plus, if a recession does come, you may be able to buy your favorite stocks at major discounts.
- Plan to invest for the long term. The market will always have ups and downs. If you obsess over every gyration, you’ll stress yourself out and potentially sabotage your own gains. With longer-term perspective, volatility will bother you a whole lot less. Both your profit potential and your blood pressure will benefit from that.
- Talk with a financial advisor to help you map out your future. An advisor can give you more education about the various ways you can use your money to accomplish your personal financial goals.
The Investment Funds Institute of Canada released a report that found investors who get regular financial advice are 1.5 times more likely to stay on course with their long-term financial plan.
Advisors help their clients manage their behavior and decisions — which is a bigger leverage point than the performance of their individual investments.
- Stick to your plan, despite your emotions (even when they scream at you). Once you set a plan to reach your goals, don’t let your emotions throw you off the path. Again, a longer-term perspective can reduce the risk of making an emotional decision. Your advisor can also help you stay focused.
While it’s natural to be nervous about the economy and the market, fear doesn’t have to dominate your thinking or dictate your decisions.
Remember that what you do matters more than what the market does and follow the 4 steps above. And if you can use some assistance, the financial advisors at Freeman Capital will be more than happy to help you explore the various investing options available to you.
Freeman Capital Advisors is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.