1. Money
Send to a Friend via Email

Recession 411 - What it is and How it Should Affect Your Investments

Recession and Your Investments - Part 3 of 3

By

The first, and possibly most important, step you should take when investing during a recession is to immediately start putting cash aside into a reserve fund, especially if you work for someone else. Because the risk of layoffs drastically increases, the most important thing you can do is keep a roof over your family's head. Most certified financial planners agree that an emergency fund should be equal to at least six-months worth of living expenses and kept in a savings account (not a certificate of deposit or other investment since you will need immediate access to the cash if you do lose your job.)

Once you've taken care of your basic needs, you can turn your attention to your portfolio. Before you start making financial decisions you should answer two questions:

1. Will the economy turn around sometime during my lifetime?

2. Is Procter & Gamble, Coca-Cola, or any other backbone of the economy still going to be in business in 20 years?

If you answered "Yes" to these two questions, then the best investment strategy should be clear to you immediately. Most investors know that the economy will be fine in the long run, and that huge declines in stock prices are only temporary, yet they are too paralyzed by fear to do anything about it!

The irony in all of this is that at precisely the time when it is wisest and most beneficial to invest, people are unable to either because of lack of money or fear. Recessions may very well be the greatest investment opportunities of a person's lifetime. If you were given $10,000 to invest in Coca-Cola, when would you want purchase shares? When they were $60 or $35 per share? The wise investor will obviously choose to invest at $35. What is a testament to Wall Street's stupidity is that during the times when these stocks fall the brokers recommend selling! The time to sell was before the stock price declined! If you believe that the United States economy will survive, then the short-term bumps in the road shouldn't matter in the slightest. Take advantage of them! If you do, then a recession is the equivalent of the manager of Saks Fifth Avenue running down the aisles of the store and marking everything 40 to 50% off. If you are smart enough to take advantage of the situation, you will emerge much better after the manager regains his sanity, especially when you realize all of the other shoppers didn't buy the merchandise because they thought something must be "wrong" with it since the price had fallen that suddenly over such a short amount of time.

©2014 About.com. All rights reserved.