Dealing with Market Downturns

Disclaimer: All of this is based on my personal opinion and not to be considered investment advice!

I started my career working in Retirement Planning, which is how I ended up learning a lot about personal finance best practices and misconceptions. I recall how around Presidential election season or during market downturns we'd be inundated with calls from scared investors wanting to liquidate their retirement accounts into cash to avoid making massive losses. Coming from an extremely risk-averse desi family where no matter my insistence my parents will not invest in the market due to fear of principal being lost, I could relate to these scared investors too.

However, what I soon realized is that this is how the rich get richer and the rest of us stay struggling. Downturns are a perfect time to make your returns if you are smart about it. Majority of us cannot time the market; we don't have the economic know-how or the time to figure out what the various FED reports and trends indicate. We'd all be millionaires if we had that knowledge!

That's why today, I wanted to share my experience investing in the stock market during recessions and what I recommend. In my opinion, our generation has experienced far too much economic instability, driven by a 3-year pandemic that wreaked havoc on markets and economies. Yet, my advice would be to strategically ride out the course.

It's crucial to keep your goals at the forefront—do you plan to buy a home in the near term, or are you planning for childcare costs or other big-ticket items? If so, it is imperative to balance your needs with risk and ensure you have at least 6-9 months of savings in a safe place, like a high-yield savings account, before continuing to invest in stocks. Additionally, for someone close to retirement or needing access to their funds soon, continuing to invest during a recession may not necessarily be the way to go; rather, it would make sense to take the existing capital gains and liquidate.

However, for most of us who still have a majority of our careers and investment time horizon ahead of us, this is the perfect time to buy. It's tempting to panic sell and take any gains you've already made, but keep in mind that the market tends to correct itself over time. For example, the S&P 500 has an average 10-year annual return of over 12%, accounting for all of the ups and downs in the market over that time, of which there are several. Simplified, this means that if you invested in the S&P 500 10 years ago, you'd be making an average of 12% each year on that investment.

Many individuals want to buy into stocks when the market is at an all-time high and then sell as soon as there is a loss. Dollar-cost averaging, which is the method of buying a regular fixed dollar amount of investment regardless of price, helps you balance the cost of your portfolio. While at a certain point of market highs you may be buying a fund for $100, during a downturn it may be worth $50, for example, bringing your average cost basis to $75. Like I said, most of us can't time the market or predict which stocks will do well, so taking on the risk of buying a single stock during a recession may not be ideal given we may not be sure if it'll bounce back to its desired value. This is why investing in broad market indices like total return funds, S&P 500, broader growth funds, and technology funds is less risky as they are passively managed and often contain a mix of the best-performing stocks, thus reducing your risk.

Additionally, if your portfolio consists of funds or stocks that are not as value-generating at any point in time, this may be a good time to recoup the losses and buy something else versus letting the money stay tied up in a loss-generating fund. For instance, I once invested in a few biotech stocks that I thought might be high-yield investments over time, but during the recession, they lost considerable gains and were not expected to make the Covid-era gains even when the market was back up. Instead of leaving my money tied up in those stocks, I chose to liquidate and allocate those proceeds towards a broader Semiconductor fund. Capital losses can also be used as a deduction to your taxable income at tax time.