Stock market enthusiasts have been hearing frequent mentions of a potential US recession over the past six months. There seems to be a consensus that some form of economic downturn is on the horizon in the United States. So, what precisely is a recession, and how should investors handle their portfolios when faced with one?
A recession is a sustained period, typically lasting over six months, characterized by a decline in Gross Domestic Product (GDP). It carries negative implications such as job losses, reduced job opportunities, and increased government stimulus efforts.
The Federal Reserve has been raising interest rates to combat rising inflation, which poses a threat of spiraling out of control. However, this action also raises concerns about the possibility of a recession. In this challenging scenario, how should investors navigate?
For Indian investors in the US stock market, the best course of action is to rebalance their portfolios. They should continue to hold and acquire stocks and bonds while considering low-duration debt funds. Implementing a strategy of purchasing stocks during market dips can be advantageous. Despite the economic slowdown, investors should focus on companies that generate cash.
During a recession, investors may become disheartened by the decline in their portfolios. However, if they have invested in high-quality dividend-paying stocks, there is no need to be overly concerned. In fact, they can view market downturns as opportunities to accumulate high-quality stocks at lower prices. Investing during a recession requires patience, as returns may not materialize overnight. Investors are advised to carefully select stocks, prioritize the best performers, and gradually build their positions. This period can also be used for portfolio reassessment, with the removal of underperforming assets that are not expected to recover in the future. Sticking with top-quality stocks can provide peace of mind, as they are often the first to rebound when conditions improve.
Additionally, investors should ensure they have enough savings to cover living expenses for three to six months and invest any surplus funds wisely. It’s essential to be prepared to hold the portfolio for 5-7 years to realize optimal returns. Constantly monitoring and reacting to daily portfolio fluctuations can be emotionally taxing and is best avoided. Diversifying the portfolio, shifting some funds into debt instruments and bonds, and patiently waiting for the recession to subside is a prudent approach. Remember that there is light at the end of the recession tunnel, and waiting it out is often wiser than making impulsive decisions that may result in selling valuable assets.
Timing the market perfectly is an impossible feat, but those who invest during economic downturns typically reap substantial returns when conditions improve. The COVID-19 pandemic’s low point serves as a recent example, where investors who entered the market during that period witnessed impressive returns within a year. History also provides numerous instances, such as the 2007-2009 financial crisis, the 2001 recession triggered by the dot-com bubble burst and 9/11, and the 1990-91 recession. Rather than succumbing to pessimism, view a recession as an opportunity to rebalance your portfolio and stay invested. As the saying goes, it’s not about timing the market but the time spent in the market that matters in the long run.