Recessions don’t mean that your investments will lose money

Did you know that in the last 30 recessions, over half had positive returns for investments? That’s right—just because the word “recession” is in the headlines doesn’t mean your portfolio is destined to shrink. Recessions are part of the economic cycle, and the impact on your investments isn’t as straightforward as many think. Let’s dive into why a recession doesn’t always spell doom for your investments and how you can safeguard your portfolio to thrive no matter the economy.

What exactly is a recession?

A recession happens when the economy experiences two consecutive quarters (or six months) of declining Gross Domestic Product (GDP), which is a measure of the country’s overall economic activity. When GDP drops, it can signal reduced consumer spending, higher unemployment, and a slowdown in business growth.

But here’s something most people don’t realize: the stock market and GDP are not directly related. In fact, in many recessions, the stock market can perform well even when the economy is shrinking. So, don’t panic just because you hear the word “recession.”

Not all recessions are created equal

The term “recession” covers a wide range of economic downturns. Some last for a few months, while others can stretch on for years. But just because the economy is slowing down doesn’t mean every aspect of it is in freefall.

Historically, 16 out of the last 30 recessions showed positive investment returns—yes, you read that correctly. The idea that a recession will automatically wipe out your savings is more myth than fact. It’s a toss-up; there’s about a 50-50 chance that the market will still go up during a recession. This is why it’s crucial to understand how your investments are performing and not just assume the worst based on economic headlines.

How is your portfolio doing?

Now’s the perfect time to take a closer look at your portfolio. Ask yourself:

• Do you know how your portfolio is performing? Regularly reviewing your investments can help you see the bigger picture, especially during uncertain times.
• Is your portfolio still growing despite economic shifts? If so, it’s worth understanding how to safeguard that growth.
• What level of risk are you comfortable with? Knowing your risk tolerance is key to making strategic investment decisions, especially in a volatile market.

In times of recession, it’s essential to evaluate the risk in your portfolio. Some investments may be more resilient to economic downturns, while others could be more vulnerable. Are your investments properly diversified? If not, now’s the time to make adjustments.

Safeguarding your portfolio in a recession

Let’s say your portfolio has been affected in part or in whole by the current economic climate. What can you do? Here are some proactive steps:

1. Diversify your investments
   

   Spread your risk across different types of investments—stocks, bonds, real estate, and even alternative assets. This helps reduce the impact of any one investment performing poorly.

2. Reevaluate risk
   

   It’s a good time to rebalance your portfolio and ensure your investments match your risk tolerance. During a recession, certain sectors may be more stable than others.

3. Take advantage of low prices
   

   When the stock market dips, it can be an opportunity to buy quality stocks at a lower price. Some of the most successful investors have made their fortunes by taking advantage of market downturns.

4. Look for safe growth opportunities
   

   You don’t have to take big risks to grow your money. There are investment options that offer low or no risk while still providing a solid return. Think about conservative investments like government bonds or money market funds, which can provide a steady growth rate even in uncertain times.

5. Focus on the long term
   

   Market dips are normal, and they don’t last forever. By staying focused on your long-term goals and resisting the urge to make panic-driven decisions, you can keep your portfolio on track.

Graph stock market with Bull and bear for finance and business concept

Don’t miss out on opportunities

While a recession may seem like a time to play it safe, it’s also a time full of opportunity. As market conditions fluctuate, new possibilities emerge for those who are ready to take advantage. Consider these opportunities:

• Reinvest in different sectors. Some industries, like healthcare or utilities, may perform well even during economic downturns. It could be worth reallocating your investments to these more stable sectors.
• Explore alternative investments. Precious metals, commodities, or real estate can be strong options when traditional stocks underperform.
• Take advantage of lower interest rates. Central banks often lower interest rates during a recession to stimulate the economy. This could be an ideal time to refinance loans or invest in fixed-income assets.

By keeping an eye out for opportunities and making strategic moves, you can turn a potential downturn into a time for financial growth.

It’s time to evaluate your financial strategy

If you haven’t evaluated your portfolio recently, now’s the time. Even if your portfolio is performing well, it’s always a good idea to revisit your strategy and ensure it’s positioned for future growth and protection. A recession doesn’t automatically mean losses; with the right strategy, your investments could come out even stronger.

• Have you safeguarded your current gains? It’s one thing to see growth in your investments, but another to protect that growth during volatile times.
• What level of risk is your portfolio taking on? Understanding your risk level can help you adjust your investments and mitigate potential losses.
• What steps can you take if your portfolio has been impacted? You don’t have to sit on the sidelines. There are always actions you can take to minimize damage and recover.

Don’t let recessions scare you

At the end of the day, recessions are just one phase of the economic cycle. They don’t last forever, and they don’t mean automatic losses for your investments. By staying informed, keeping a close eye on your portfolio, and being open to new opportunities, you can navigate these uncertain times with confidence and come out ahead.

The key is to remain calm, evaluate your financial strategy, and make proactive adjustments where necessary. Recessions don’t have to be synonymous with losing money; in fact, with the right approach, they can be a time of opportunity and growth. Book a complimentary appointment to meet with an advisor to ensure your finances can withstand a recession.