InSight

How to Survive a Bear Attack? (Pt. 1)

Financial Planning Dentist

Growing your Investment Balance During a Recession

One of the biggest reasons the rank and file investor loses money during a recession is a lack of focus and plan. It is true that markets will get volatile from time to time. But why institutions tend to make money during these periods and private investors lose money is all in how they react. The pejorative term “smart money and dumb money” is never more clear than when tracking behaviors during a pandemic. 

“Smart Money” is patient, it knows what it owns and why, and has a long-term view. Institutions watch markets daily and don’t react. They know what they’re looking for in market trends before the headlines tell them what to be excited about. 

“Dumb Money” is reactive and follows markets where headlines lead them. They are concerned with “account balances” and what they hold. They will routinely sell and buy in synchrony with headlines and sentiment. 

That being said, it’s easy to get fearful when the economy is down (a recession), and it’s even easier to react to what you hear about the market. Likewise, it is entirely normal for you to be curious about how you can make money by investing in these times. 

Certain investments, such as stocks, can be riskier in a down market, this is true. However, you might be able to see large returns from a recession if you follow these basic and timeless strategies.

While it’s tempting to try to “time the market” when stock prices are low and falling, what you end up doing is trying to front run other speculative investors. This is a costly and often errant strategy. You might be shocked then to hear that the best way to invest during a recession is the same as when the economy is growing. They are investors who own what they want and slowly accumulate more of it in a routine and measured way over a long period of time. You can do this as well by setting a monthly cadence and doing the following:

Continue to Dollar-Cost Average (DCA)

Whether you’re regularly contributing to a 401(k) or an IRA, or investing through your broker, it’s wise to continue doing so during a recession if you can. Recessions are not a permanent state of affairs and anyone who can tell you how and why they will end is guessing. The best investors work with CFP®s to develop a cadence to keep buying through the whole troughing phase of the recession. This allows the investor to capture the stocks they want, at typically lower prices and continually buy throughout the entirety of the business cycle. 

You will likely miss out on important dividends and reinvestment opportunities if you are out of the market. However, buying more shares when the economy is weakened is some of the best buying opportunities an investor has. Those who are in the accumulation stage of investing should hold tight, know what they want, and put themselves in a position to own more of what they want. 

As you continue to buy lower, you are making the average price you pay for stock lower, which tends to boost returns in the long run and allows you to be more tactical with your selling come to the retirement phase. 

Rebalance Your Portfolio

We own companies for a reason, some are essential businesses that will do well during or following the emergence of a recession; even if their activities beneath the surface are not immediately reflected in the share price. A good example of this was Amazon during the ‘08 financial crisis. This is a company that saw the stock fall from the mid $80s to the low $30s all while consumers were looking for a cheaper way to get their goods and shore up their own home economics. A gap Amazon was willing and able to step into. They grew their customer base incredibly through this period resulting in an appreciation of their stock price for the next decade.  

You can change the balance of your holdings when you notice prices falling. You then rebalance your holdings or return your asset allocation to its original targets. This maneuver allows you to deliberately increase your exposure to “oversold” and “undervalued” positions in your portfolio. When these stocks rebound, you bring the exposure back down to the desired levels. This small and subtle re-posturing allows investors to take advantage of the short-term price dislocations in a long-term, value-based strategy. 

For example, if your target balance is 20% software and technology, but the price drops to 15% in the portfolio, adjusting this back to 20% in the throes of a bear market will mean that when the sector or stock returns to a higher price, you will have a higher exposure (say 25%) and you will be in a position to sell. 

Keep a Long-Term View

If you’re buying stocks, ETFs, or stock mutual funds, you won’t need to withdraw from your account(s) for at least five years to ten years. If that is your timeframe, the current recession will be well in the rearview mirror before you need these funds. The average “recession” since World War II is one year (11.2 months). This is a combination of a few economic reasons, but suffice it to say, that while the sentiment becomes bleak, relative to the length of a bullish economy, it is a very small part of the investment cycle.

That being said, it’s important to keep the long-term view – markets restore balance and are still the best way to increase your individual wealth. The historic 10.5% return of the S&P 500 takes into account these slowed economic times. In fact, if you step out of the market, don’t reinvest dividends at these levels, and don’t rebalance your portfolios, you will likely lower the long-term return that you are expecting.

The Bottom Line

Financial markets are the single most efficient way of transferring money from the national and global markets to cash in your bank account. Recessions are by their definition a period in which the speed of that transfer slows down, not stops. So those that accumulate assets up to and through a slow down reap the benefits when the pace of that flow speed back up.

 

This article is continued in:

How to Survive a Bear Attack? Pt. 2

How to Survive a Bear Attack? Pt. 3

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