One For The Money

Recessions receive a lot of attention, and rightly so. Few things strike more fear in the hearts of Americans than the job losses, bankruptcies, and plummeting stock markets associated with recessions. On March 6th, the Wall Street Journal published “Why the Recession Is Always Six Months Away.” The article noted that the next economic downturn has become the most anticipated recession in recent U.S. history. 

In episode 18, I shared a painful story of when I became spooked during a recession and made an unfortunate decision not to stay invested. As a result, I missed out on tremendous gains. What should we do about investments when we’re on the supposed precipice of a recession? The stock market can feel too much like a roller coaster, even investing with goals and a plan.

Believe it or not, a recession can be a good thing. While a recession has plenty of negative consequences, recessions are an inevitable and necessary part of the economic cycle. Recessions are a way for the economy to bring things back into balance after straying too far from reality. Many of us might remember the dot-com era when companies with nothing but a website domain name and no viable plan to make profits became valued at hundreds of millions of dollars. More recently, the stocks from companies that facilitated working from home soared only to come back down to earth when their profit potentials also came back down to earth.

How does this happen? The stock market is essentially a popularity contest where the stocks of popular companies are voted higher. Over the long term, the stock market will weigh a business precisely as businesses should be weighed: the ability to generate consistent profits. During recessions, companies are weighed the most regarding their profitability.

Recessions return money to businesses that generate reliable profits, enabling future growth. We have to cut back the overgrowth with pruning to have new growth. Pruning done via recession creates these growth conditions. For these reasons, my and my clients’ money is invested according to personal goals and financial plans, emphasizing value investing and corporate profitability. 

The ups and downs of the market can be scary. A good investment rule is to invest according to your goals and have a plan that isn’t dependent on the stock market’s status. Your time horizon is a necessary consideration. If you’re within five years from retirement, you must begin adjusting your portfolio. Otherwise, there is a significant risk that you could have a lot less to spend during retirement. If you are further than five years from retirement and can adopt a long-term perspective, a recession can be a great time to hunt for bargains and purchase undervalued assets.

Sometimes the best strategy is simply to ignore the markets and keep making periodic contributions via your retirement accounts. Dollar-cost averaging is a great strategy to invest at regular intervals, removing the emotion from investing. Over the past 100 years, the U.S. stock market has been up roughly three out of every four years. 

The progress we have seen in the past 50 years has been remarkable, and the pace of positive change will only increase and continue. Investing in the stock of companies is investing where innovation happens. Life has improved for everyone in this beautiful world over the years. For example, in the 1980s, 50% of the world lived in poverty. Now it’s less than 10%. If we focus on the negative, we miss seeing how bright the future can be and the opportunities around us. 

Securities and Advisory services offered through LPL Financial. A registered investment advisor. Member FINRA & SIPC.

• Economists in WSJ Survey Still See Recession This Year Despite Easing Inflation
• The Recession Is Always Six Months Away, Complicating Fed Chair Powell’s Inflation Fight - WSJ
• Ben's 4 Common Sense Rules of Investing
• How Dividends Juice Your Returns in the Stock Market - A Wealth of Common Sense
• The Best Time to Invest, Ep #10
• When Life Gives You Lemons, STAY INVESTED!, Ep #18 
• The Case for Optimism, Ep #17
• Ways to Avoid Running out of Money in Retirement - Most Accidents Happen on the Way Down, Ep #20