3 reasons to hold your investments during a recession
Recessions may be intimidating, but they are normal and inevitable. The stock market ebbs and flows, and for every tremendous bull market, there will eventually be a bear market, too.
Stock market crashes and recessions don't always happen at the same time (take last summer, for instance, when the U.S. officially entered a recession while the stock market was setting record highs), but they often go hand-in-hand.
Despite the incredible run the market has had over the past year, it will experience a downturn sooner or later. But there are a few good reasons to hold onto your investments no matter what the market does.
When stock prices start plummeting, it can be tempting to sell your investments to try to salvage what you can before things get worse. However, market downturns are one of the worst possible times to sell your stocks.
When a market downturn occurs, stock prices are lower. If you bought your investments when the market was thriving, you likely paid more for them because prices were higher. That means that if you sell during a downturn, you could end up selling your investments for less than you paid for them.
No matter what the market does, it's important to remember that you won't lose any money unless you sell. Even if your investments decrease in value, you only lock in those losses by selling when prices are lower. By holding your stocks until prices recover, you can avoid losing money.
In theory, the best way to maximize your returns would be to buy stocks when the market bottoms out and prices are at their lowest, then sell when prices reach their peak. This is called timing the market, and while it may sound like a smart strategy, it's incredibly difficult to pull off.
Nobody -- even the very best investors -- can predict exactly what the market will do. The stock market is unpredictable, and if your timing is even slightly off, you could potentially lose a lot of money.
Take the 2020 market crash in the early stages of the COVID-19 pandemic, for example. That crash happened suddenly, and the S&P 500 lost more than one-third of its value in a matter of weeks. If you sold your investments a week or two after prices started to fall, not only would you have locked in your losses by selling when prices were lower, but you also could have missed the market's incredible -- and almost immediate -- recovery.
In other words, by trying to time the market, you could potentially buy when prices are high, sell when prices are at their lowest, then rebuy when prices are high again. By simply holding onto your investments through the rough patches, you're more likely to make it through to the other side unscathed.
No investment is immune to stock market volatility, but strong, healthy companies are more likely to recover from market crashes and recessions.
To determine how strong a company is, do your best to understand its underlying business fundamentals. Does it have a competitive advantage in its industry? Does it have a strong leadership team that will make good business decisions in tough times? Are its finances healthy? The stronger a company is, the more likely it is to survive even the worst market crashes.
As long as you're investing in solid companies, your investments should bounce back after periods of volatility. So when the market starts to take a turn for the worse, you're better off holding your investments and weathering the storm.
Recessions often bring market downturns along with them, and it's human nature to want to do something to protect your investments. Oftentimes, though, the best thing you can do is to simply hold your stocks and wait for the market to recover.
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