- \ Gerard Gruber
- October 2, 2020
!finance investment advisor
Smart money moves to make when the market is down.
If you are among one of those fortunate enough to have extra cash and a reliable job during a recession, you may be wondering if it’s better to save or invest your extra income. Naturally, many investors grow wary of investing in a downturn, but is saving the better option?
What should you do with your extra cash in a recession?
Check your emergency fund.
First and foremost, you’ll want to make sure you have at least 3-6 months worth of income in an emergency fund should you suddenly lose your job or an unexpected expense arises, such as a hospital visit or vehicle repair. Having this safety net in place should be your first priority before saving or investing elsewhere.
Examine your timeline.
The decision of whether to save or invest will heavily depend on your age and how far away you are from your estimated retirement date. An individual in their 20s or 30s has far more time to withstand market volatility than someone approaching retirement. In other words, younger individuals have time to wait for the market to recover and make gains on any funds invested in a recession.
A pre-retiree will be more conservative as their timeline to retirement is shorter and their tolerance for market risk is lower. Someone in this situation would want to make sure they had 2-3 years worth of income available from retirement savings should the market not recover before they retire. Individuals over the age of 65 will want to be more protective in their investment strategy. Taking on took much market risk could jeopardize their retirement date.
Consider the pros of investing.
The advantage of buying in a market downturn is that the prices of stocks are depressed. Suddenly big ticket stocks that were too expensive at the height of the market are more accessible. And, investors can buy more shares of the same stocks they already have for less money. Investors who “buy into” the market in a downturn and have time to wait for recovery can make significant gains when the market rebounds.
If you have maxed out your workplace 401K and still have extra cash on hand, consider a dollar-cost averaging approach. Dollar-cost averaging is a long-term approach where you invest equal dollar amounts into the market at regular intervals of time rather than investing a lump sum all at once. This allows you to build up your position in a certain stock or mutual fund over time.
In a volatile market, dollar-cost averaging allows you to take advantage of different lows the stock might hit. So, rather than investing 10K in Google all on one trading day, you spread it out over 4 different trading days that month to increase your odds of buying some shares at a lower price.
What market sectors should be considered right now?
In Q4 2020, we are headed toward a national presidential election in the midst of a worldwide pandemic, the latter of which has undoubtedly been controlling market movement since Q1. Given these conditions, some investments to consider are in technology stocks and COVID stocks. Technology stocks also include any company working on advancements toward the future, such as AI. COVID stocks are stocks that have surged as a result of the pandemic. With everyone working virtually from home, products from these companies have become indispensable for the foreseeable future.
Right now, there are no cheap investments. As of August 2020, stocks have rallied to end the market’s shortest bear market in history and hit record highs. This is another reason to consider dollar-cost averaging. But, overall, choosing growth and future-looking stocks should put investors in a good position going forward.
Allocate and diversify to manage risk.
As always, remember to keep your portfolio diversified and your funds allocated to investments that help you meet your goals on your timeline. Essentially, don’t put all your funds in one place. Spreading your investments between different investment options and asset classes protects you from holding too concentrated a position in any one place. This “spreading around of the money,” as it were, is a method to hedge against the risk associated with any single investment. These principles are critical to investing in any environment. It’s important to understand that asset allocation and diversification can’t ensure a profit or prevent a loss in a market downturn.
Stay focused on the long-term.
The most important thing to keep an eye on in a recession are your long-term investment goals. Don’t get caught up in day trading or trying to time the market because you suddenly see a stock dropped to a lower price. Do, however, consider using your extra cash to increase your position in an investment while the prices are low if you aren’t nearing retirement and will need those funds to live on in the very near future.
The topics discussed in this article are for general information only and are not intended to provide specific investment advice or recommendations. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. Individuals should always consult their own financial, tax or legal advisor regarding their specific financial situation before acting on any information provided. Neither Harbor West nor Geneos Wealth Management provide tax or legal services.