{"id":15811,"date":"2022-06-16T11:51:41","date_gmt":"2022-06-16T18:51:41","guid":{"rendered":"https:\/\/www.wealthfront.com/blog\/?p=15811"},"modified":"2023-10-10T15:35:22","modified_gmt":"2023-10-10T22:35:22","slug":"is-a-recession-bad-for-investors","status":"publish","type":"post","link":"https:\/\/www.wealthfront.com/blog\/is-a-recession-bad-for-investors\/","title":{"rendered":"Is a Recession Bad for Investors?"},"content":{"rendered":"\n

A recession, commonly defined as two quarters in a row of shrinking gross domestic product<\/a> (GDP), is generally considered bad news. Recessions cause real suffering, especially through rising unemployment and general financial uncertainty\u2014so it\u2019s normal to feel concerned about an economic slowdown and the impact it could have on you and your loved ones. But unemployment aside, if you\u2019re a young investor with a diversified portfolio and a long time horizon, you don\u2019t need to be too worried about the impact a recession will have on your long-term wealth-building. In fact, a recession could actually work in your favor. <\/p>\n\n\n\n

In this post, I\u2019ll walk through why investors can find a silver lining in a recession and provide some tips for protecting your wealth during economic downturns.<\/p>\n\n\n\n

Recessions are common and temporary<\/h2>\n\n\n\n

According to the National Bureau of Economic Research (NBER), there have been 34 recessions since 1854, including the 2020 recession. Using NBER\u2019s definition, this translates to a recession every 4.94 years on average. It\u2019s worth noting that the NBER defines a recession<\/a> as a \u201csignificant decline in economic activity\u201d that lasts for \u201cmore than a few months\u201d\u2014not necessarily two consecutive quarters. The takeaway? Even if this is your first recession, it\u2019s probably not your last.<\/p>\n\n\n\n

Fortunately, even though recessions are common, they\u2019re not permanent. To date, every single recession in the US has recovered eventually. According to NBER research, recessions between 1945 and 2009 only lasted about 11 months<\/a> on average. That\u2019s not very long, especially if you’re investing for the long run. <\/p>\n\n\n\n

You can benefit from investing in a recession<\/h2>\n\n\n\n

You get to buy investments at a discount<\/h3>\n\n\n\n

Let\u2019s imagine you have a favorite breakfast cereal, and you buy a box of it every week or so at the grocery store. If that cereal went on sale for a few weeks or even months, odds are you\u2019d be happy about it. <\/p>\n\n\n\n

This makes intuitive sense, but investors sometimes have trouble applying the same logic to stocks when they\u2019re on sale. In a recession, the stock market will usually decline sharply \u2014on average, the S&P 500 has dropped about 29%<\/a>. But if you believe that the market will rebound eventually<\/a> (and historically, it has) you can look at stocks as being on sale, just like your favorite breakfast cereal in the example above. Using this logic, it\u2019s a good thing when the market is temporarily down and you can buy investments at more reasonable prices. <\/p>\n\n\n\n

You can even come out ahead when you invest in a declining market<\/a> compared to investing a steadily rising one. To take advantage of this, you can use dollar-cost averaging (a strategy that involves investing a set amount of money on a schedule, like $100 a week or $500 per month). That way, you don\u2019t have to worry about picking the \u201cright time\u201d to invest\u2014you\u2019ll just buy investments at a range of prices over time, and during a recession, some of those prices are bound to be lower. <\/p>\n\n\n\n

You can harvest losses to lower your tax bill<\/h3>\n\n\n\n

It\u2019s not fun to watch your portfolio temporarily decline in value, but there\u2019s a silver lining: tax-loss harvesting<\/a>. When the value of an investment dips below its purchase price, you can sell it at a loss and replace it with a similar investment. This allows you to \u201charvest\u201d the loss and maintain the overall risk and return characteristics of your portfolio. Come tax time, you can use that loss to lower your tax bill.<\/p>\n\n\n\n

Done manually, tax-loss harvesting can be labor-intensive. But Wealthfront\u2019s Tax-Loss Harvesting<\/a> handles the process automatically and at no extra cost. Clients who started using our Tax-Loss Harvesting last year received tax savings worth between 4 and 9 times our advisory fee<\/a> in 2021. <\/p>\n\n\n\n

How investors can prepare for a recession<\/h2>\n\n\n\n

Make sure you have a good emergency fund in a high-yield cash account<\/h3>\n\n\n\n

Recessions often mean higher unemployment, so they\u2019re a good time to make sure you have an adequate emergency fund<\/a>. For most people, this means holding enough cash in reserve to cover 3-6 months\u2019 worth of living expenses. The right amount for your specific situation will depend on your age, profession, investable assets, and your extended family\u2019s financial needs. It\u2019s wise to hold your emergency fund in a high-yield account like the Wealthfront Cash Account<\/a>\u2014with a 3.30% APY through our partner banks, no market risk, and 32 times the FDIC insurance offered by a traditional bank account, it\u2019s a safe place for your emergency savings to grow until you’re ready to invest.\u00a0<\/p>\n\n\n\n

Having a good emergency fund can give you some peace of mind. If you\u2019re concerned you might be affected by layoffs, you\u2019ll probably sleep better at night knowing you have enough cash to cover your bills until you find a new job. <\/p>\n\n\n\n

If you do experience job loss or wage loss<\/a>, we also recommend that you cut your spending (which will help your emergency fund last longer) and ask your service providers about any payment extensions they may be able to offer.<\/p>\n\n\n\n

Stay invested, even if your investments are down<\/h3>\n\n\n\n

No one likes logging into their brokerage account and seeing that their portfolio is worth less today than it was yesterday, but in a recession, this is bound to happen. Some investors will even feel tempted to liquidate their account in an attempt to minimize further losses. If this sounds like you, consider checking your portfolio less often until the market stabilizes. This strategy won\u2019t change what\u2019s happening to your portfolio, but it will<\/em> make it easier for you to stay the course, which is key to long-term investing success. <\/p>\n\n\n\n

Make sure your investments are diversified<\/h3>\n\n\n\n

Diversification<\/a>, or the practice of buying different types of investments to improve your risk-adjusted returns, is especially important in a recession. Different asset classes will fare differently when the economy slows down, and you\u2019ll be better insulated from losses if you don\u2019t put all your eggs in one basket. If you feel insulated from losses, it\u2019s emotionally easier to stay in the market.<\/p>\n\n\n\n

You might see news articles about doubling down on certain asset classes or sectors during a recession. But if you have a diversified portfolio built to weather all market conditions like Wealthfront\u2019s Classic<\/a>, Socially Responsible<\/a>, or Direct Indexing<\/a> portfolios, you\u2019re already set: these portfolios are globally diversified across a range of asset classes (unlike, say, just investing in a US stocks index fund). Remember that adjusting your asset allocation in response to market conditions is a form of market timing\u2014and unfortunately, academic research has consistently shown that this doesn\u2019t work. <\/p>\n\n\n\n

The bottom line<\/h2>\n\n\n\n

Recessions are uncomfortable, but they\u2019re a normal part of long-term investing. They\u2019ve always recovered eventually, and can even be good for investors. Assuming there\u2019s no major change in your financial situation like job loss or supporting a family member (in which case you might need to slow down the rate at which you\u2019re putting money in the market), stick to your investing plan and try to ignore the headlines. If you keep rebalancing your portfolio, harvesting your losses, and making regular deposits, you\u2019re likely to come out ahead in the long run. <\/p>\n","protected":false},"excerpt":{"rendered":"

A recession, commonly defined as two quarters in a row of shrinking gross domestic product (GDP), is generally considered bad news. Recessions cause real suffering, especially through rising unemployment and general financial uncertainty\u2014so it\u2019s normal to feel concerned about an economic slowdown and the impact it could have on you and your loved ones. But […]<\/p>\n","protected":false},"author":10000,"featured_media":15820,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1315,1282],"tags":[],"coauthors":[2505],"class_list":["post-15811","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-industry-insights","category-investing"],"acf":[],"yoast_head":"\nShould Investors Worry About a Recession? | Wealthfront<\/title>\n<meta name=\"description\" content=\"Here\u2019s exactly what you need to know about investing in a recession and how it can impact your long-term wealth.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.wealthfront.com/blog\/is-a-recession-bad-for-investors\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Should Investors Worry About a Recession? 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