New economic data shows that GDP has declined for two consecutive quarters, implying that the US economy contracted during the first half of 2022.
This is commonly referred to as a technical recession, although officially we are not currently in a recession. The National Bureau of Economic Research, which includes the economists responsible for declaring whether the country is in a recession, has yet to make an official call — although it could be.
All this uncertainty can make investors wary, and it can be difficult to decide what to do with their money. Is it really safe to invest now? Or should you wait? There are a few things to consider.
If you have to wait
It can be difficult to invest during a recession, especially if you’re struggling financially. Unless you have extraordinary savings, it would be wise to focus on this goal before investing in the stock market.
A recession is one of the worst times to sell your investments. If you buy now and the market drops sharply, the value of your portfolio will drop. Then, if you run into unexpected expenses or lose your job and realize you need that money, you may be forced to sell your investments at a discount — and lock in your losses.
Before you invest, make sure you have at least a few months worth of savings in an emergency fund. In this way, it will be much easier to leave your investments alone and avoid withdrawing money at the worst possible time.
Also, if you’re investing for a short-term goal, it might be better to wait for now. For example, if you’re investing money that you plan to use for a down payment on a house in the next few months, it can be risky. If the market falls before then, you will either have to postpone your target or sell your investment at a discount.
Why you should keep investing
It may seem counterintuitive to continue investing when the stock market is falling and the economy is heading for recession. After all, with a steeper drop expected, investing now may seem like a risky move.
However, recessions are actually one of the best times to invest because stock prices are much lower. As you continue to invest, you can get hooked quality stock at a small price. Right now, some stocks are down 20%, 30%, 40% or more, giving you the opportunity to buy at a significant discount.
The caveat, however, is that it may take time to recover your investment. No one knows how long this economic downturn will last, so if you decide to buy, be sure you are prepared to hold onto your investment for at least a few years.
Although it’s a long wait, the payoff can be huge. By investing when prices are at their lowest, you can see significant returns when the market inevitably rebounds.
Recessions can be scary, but they’re normal. If you develop a strategy, you can be as prepared as possible no matter what happens with the economy.
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