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How to Invest in a Downturn

Apr 17, 2020 3 min read Eric Rosenberg

Key Takeaways

  • A market crash doesn't mean you must dump your investments.
  • Steady investing over time usually weathers market volatility.
  • Market downturns don't last forever.

 

 

The recent stock market plunges in the wake of the coronavirus pandemic might leave you wondering how to invest in an economic downturn. It's important to keep a level head and avoid knee-jerk reactions. These tips can help you stay on track to meet your financial goals.

 

Selling on the way down isn't always smart

When stock prices fall, many people rush to sell their investments. But “following the herd” usually isn't the best course of action. If you unload your investments during a downturn, you'll likely sell at a loss — or at least for a lot less than you would have before things headed south. That turns “paper” losses into real ones. Worse, if you’re out of the market, you won’t benefit from the eventual rebound.

Historically, every major U.S. stock market downturn has been followed by an even bigger upswing. Both the Great Depression and the 2007–2008 financial crisis preceded record “bull” markets. It may take time for the market to recover, but it's likely to come back.

 

Even experts can't time the market

Professional money managers work hard to pick the best stocks and beat the markets. However, more than 80% of "active" fund managers consistently do worse Opens in new window than the overall market itself. If experts who spend 12-hour days on Wall Street can't beat the averages, it's unlikely that anyone else will do better.

Simply put, there’s no crystal ball that tells us exactly when to buy and sell. People who try to “time” the market — sell when prices peak and buy when they hit bottom — usually get it wrong.

 

Invest steadily, regardless of conditions

In general, the best investment method is a steady one. On any given day, you may have positive or negative returns. But over long periods, the markets tend to go up. Also, a diverse portfolio of stock, bond and cash investments can help protect your portfolio from the whims of the market and poor performance of specific assets.

If you’re in a 401(k) or similar plan at work, you probably invest a modest percentage of each paycheck regardless of how the market performs day to day. You should mirror this approach in other retirement and investment accounts if you have them. By regularly investing a fixed amount — a strategy called dollar-cost averaging — you'll limit the effects of market volatility on your portfolio.

Historically the S&P 500 index, which tracks the largest U.S. company stocks, has gained around 10% a year. Even if past performance is no guarantee of future results, if you have the stomach to wait out a market downturn, the long-term results should work in your favor.

 

Time can help you recover

If you're planning to retire and tap your nest egg within the next five to 10 years, a trusted financial advisor could help you stretch your investments into your golden years.

If you have a decade or more before you plan to retire, a market downturn shouldn't be a huge concern. While it isn't any fun to see your portfolio’s value fall, it will likely come back and bring returns over the decade — or decades — ahead.

For now, don't rush and sell all your investments. You could end up “locking in” losses and missing the recovery on the other side of the crisis. By maintaining a long-term perspective, you can weather this storm and come out of it.

 

 

What you can do next

The best answer may be, do nothing. But talk with a financial advisor about how to invest in a downturn. Have them review your investments and strategy to make sure they're in line with your goals.

 

Footnotes

Eric Rosenberg is a finance, travel, and technology writer in Ventura, California. He has in depth experience writing about banking, credit cards, and investing.

 

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