The Good News About Recessions for Investors
Yes, an official recession is possible, but based on previous recessions, there could be reasons for investors to smile. With that in mind, here are three ways to position your portfolio now – and one major mistake not to make.
Are we going into a recession? This question has been in the news and on the minds of investors for months, and the recent announcement that GDP has decreased for the second straight quarter makes the question even more pressing.
A recession implies trouble for investors. Many believe that once a recession is announced, the stock market will drop sharply – and so changes will be needed to their portfolios to weather the storm. But history indicates a different scenario. Instead of dropping further when a recession is officially announced, the market often moves up.
That is because, in part, recessions are often declared several months after they have started. The National Bureau of Economic Research, a private, non-partisan organization, makes this call after analyzing many economic data points that take time to collect. This information includes, but is not limited to GDP growth.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Why Now May Not Be the Time to Be Defensive
But research by CI Brightworth in Atlanta shows that once an official recession is announced, much, if not all of the market’s downturn has already taken place. So, getting more defensive after a recession is announced may be the worst thing an investor can do.
In three of the last six recessions since 1980, the stock market hit a bottom before the recession was officially recognized. Even more important for investors, after those six recessions, the market quickly moved up five times – ranging from 10.3% to 34.5% only one year following the recession announcement. Strong gains continued for three and five years after a recession was declared – in three cases, the gains topped 100%.
So, what does this mean for investors? The data show that taking defensive actions when a recession is announced has worked poorly in five of the six last recessions. A defensive action ranges from reducing exposure to stocks all the way to the “big mistake” of shifting the entire portfolio to cash.
So, what is an investor to do? Here are three recommendations:
Stop Trying to Time the Market
Trying to get into and out of the stock market is a fool’s errand and one of the biggest wealth destroying actions an investor can take. The market is forward looking and moves prior to the underlying economy. If you’re trying to move into and out of the market based on what’s happening in the economy, you are more likely to do the wrong thing at the wrong time and harm – not improve – your returns.
Stay Disciplined
If you are investing new money, either through your 401(k) plan, individual retirement accounts (IRA) or other plans, continue to follow your long-term investment strategy. You should be excited about the opportunity to buy more stocks when they are “on sale.” If it feels painful to add money to a falling market, consider automating your contributions and investments so you can reap the benefits of lower valuations without contemplating the market’s every move.
Add Stocks to Your Portfolio When They are Down
Use the downturn to rebalance your portfolio by selling assets that have performed the best and buying the assets hardest hit by the market’s tumble. For example, this could mean selling investments in some commodities and real estate while picking up high-quality stocks that have lost a significant amount of money this year. Rebalancing your portfolio is one of the most effective ways to ensure you follow the classic adage of buying low and selling high.
No one knows when the next recession will arrive or how the market will respond when it does. However, by following these key steps, investors can be prepared for any further volatility while also helping to favorably position themselves on the other side.
-
The Top 10 Side Gigs For Retirees In 2026Money is freedom in retirement; here’s how to earn more of it with a profitable side gig
-
3 Retirement Changes to Watch in 2026: Tax EditionRetirement Taxes Between the Social Security "senior bonus" phaseout and changes to Roth tax rules, your 2026 retirement plan may need an update. Here's what to know.
-
The 'Yes, And...' Rule for RetirementRetirement rarely follows the script. That’s why the best retirees learn to improvise.
-
What Not to Do After Inheriting Wealth: 4 Mistakes That Could Cost You EverythingGen X and Millennials are expected to receive trillions of dollars in inheritance. Unless it's managed properly, the money could slip through their fingers.
-
'The Money Prism' Solves Retirement Money's Biggest Headache: Here's HowThis simple, three-zone system (Blue for bills, Green for paycheck, Red for growth) helps you organize your retirement savings by purpose and time.
-
No, AI Can't Plan Your Retirement: This (Human) Investment Adviser Explains WhyAI has infinite uses. But creating an accurate retirement strategy based on your unique goals is one place where its possibilities seem lacking.
-
Don't Let a 60/40 Portfolio Derail Your Retirement: Why a Cookie-Cutter Approach Could Cost YouChoosing a personalized retirement investment plan, rather than relying on the 60/40 portfolio, could help protect your savings and ensure long-term growth.
-
Are You Winging Your Retirement Plan? A Wealth Adviser's Tips to Help Build Wealth and Navigate RiskIf you have no strategy tying together your accounts or haven't modeled scenarios to make sure your savings will last, then your plan is probably inefficient.
-
Divide and Conquer: Your Annual Financial Plan Made Easy, Courtesy of a Financial AdviserOverwhelmed by your financial to-do list? Split it into four quarters and assign each one goals that connect to the time of year. It could be life-changing.
-
High-Income But Low Confidence? This 5-Point Plan From a Financial Planner Can Fix ThatHigh earners can still feel they're on shaky ground financially. Rebuild your confidence with a plan that understands your present and protects your future.
-
Your Post-Accident Survival Guide, From an Insurance ExpertAfter a car accident, stay calm and document everything to preserve the facts. Remember: You don't have to solve the problem — that's why you have insurance.
