Save or Invest: Which is Better in a Recession?

Save or Invest: Which is Better in a Recession?

Should you save or invest during a recession? That’s a controversial topic and before we make our decision, we should think about certain scenarios. Recessions 2-3 years and they are marked with lots of employee layoffs, companies going bankrupt, people losing their homes, etc. 

There are lots of unpleasant scenarios that could occur during a recession. Investing in such market conditions may lead to lots of losses, but it could also lead to significant profit. I bet you heard that some people make their fortune when everyone is selling.

Save or invest during a recession?

If you want to invest, I would definitely recommend you to save before that. That would mean getting prepared with an emergency fund at least. In such turbulent times, a 6-8 (or more) months worth of your bare expenses should be already allocated to your emergency fund. If that’s not the case, the sooner you start – the better.

If you already have such an emergency fund, there are 2 options ahead of you. The first one would be to extend it to 1-year coverage of your bare expenses. This way you will have extra cushion in case something really goes wrong during a recession. Losing your job and unexpected medical expenses could easily destroy 2 months’ worth of your bare expenses.

The second option would be to create a sinking fund. That will help you cover all of your utility, medical, and transportation bills, as well as rent. If you are not debt-free yet, you can allocate at least 6-months worth of debt payments here.

Assuming you already covered yourself well with the above steps, we can discuss investing now. 

I want to invest, but I’m afraid of the market going down

It’s a recession, the market will go down and that’s completely normal. However, if you’re afraid that all of your investments might also go down, you’re definitely right. Most of your investments will definitely go down. There are certain industries that are considered recession-proof (like consumer non-cyclical) where you may find yourself in a bit better situation.

However, during a recession, pretty much everything goes down. If you hold all of your money in a bank account and that bank goes bankrupt, you might be in trouble. 

One thing to consider is that if the market is in recession and goes down significantly fast than everyone expects, it will also go up in a similar fashion. The proof is what happened in the shortest bear market of all-time – this year. March 2020 the market went down sharply, finding itself in a new all-time high during August. 

The market will always go up and down, it’s what it does. If it doesn’t go up after a certain event, then the market itself would be our smallest problem. To save or invest during a recession is a personal preference. 

However, you should consider the possibility of losing all of your money if you just hold them into a bank account. Even if the bank survives it, that doesn’t mean that your money will have the same value as before the recession itself.

Where to invest during a recession?

If you’re not afraid of the market swings during a recession and you want to invest, then the possibilities are vast. If you consider yourself a defensive investor, you may think of the S&P500 index fund or ETF that follows the index. This way the index will take care of your investment without you doing anything. 

Why is that, you may think? Well, the S&P500 is having 10-11% of annual return since its inception in 1926. There aren’t many savings accounts that offer such a return (if any at all). This means that this index survived all of the recessions up until today and continues to generate growth.

If you consider yourself a more entrepreneurial investor, you may consider any industry or sector you are familiar with. Do your analysis and research well, consider the company’s true value compared to its share price, and go ahead. Creating a dividend stock portfolio might help you get out of the recession with a new passive income. Isn’t that great?

Recession-proof investing portfolio

Even if you chose to save before investing during a recession, saved money, and then started to invest, you should consider portfolio diversification. That would mean stocks in multiple industries and also bonds. With a good amount of diversification between stocks and bonds, your portfolio may survive significant beating. 

Benjamin Graham in his book “The Intelligent Investor” suggests that a well-diversified portfolio will hold 25% stocks and 75% bonds or vice-versa. The amount of stocks and bonds depends on the investor itself, but the ratio should stay relatively the same. If you still insist on holding stocks only, his advice is that you may consider owning no more than 10-30 different issues. 

Between 10 and 30 stock issues is what will give you enough buffer in case something goes wrong with a certain industry or company. I would say this number depends on how big your portfolio is, but 30 issues sound like the reasonable maximum.

Should I wait for the market’s lowest point?

Waiting for the market’s lowest point means that you will definitely miss that lowest point. There is no way you could know which is the exact place the market will bounce off its lowest point and it will continue upwards. That said, whenever you start to invest during a recession, you will do great. 

One thing I heard from a certified financial analyst was that he invests in a certain stock as soon as it goes down with 15%. If it goes down with another 15-20%, he invests again. If you did your analysis and research well, that strategy may very well lead to skyrocket-like growth whenever the market goes up. 

I personally tested that in early April when everything was going down, I bought Apple shares back then. On August 28th my investment has grown with 80% and I sold it because the stock was heavily overpriced, while we expected a stock split on the next business day. After the stock split, I could buy a lot more shares with that profit, so apparently there’s some truth behind this idea.

Even removing the factor of the stock split, I still profited quite a lot and that’s not the only company I invested in at the end of March/early April.

So, should you save or invest during a recession?

I would say it depends. If you already saved enough for a decent emergency fund and a sinking fund, then you’re good to go and start investing. However, without preparing yourself for the upcoming market conditions, you are putting yourself, your household, and family at risk.

If you’re done with your emergency and sinking funds, then do your research and analysis and start investing. When the market goes up, you will be looking at the profits and thinking of the next step in your investing journey.

Have your own plan for the next recession? Share it with us in the comment section down below!

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