It’s no secret that stock prices fall as much as they rise, but if you didn’t know that already … I don’t really know what to tell you. The markets have endured numerous recessions and there are still fears abound that we’re destined for another shortly, but what does one do during a recession? Should I sell all my shares and try to time it just right? Nope. In the wise British words: Keep calm and carry on.
No investor, amateur or otherwise, wants to see any negative values in their portfolio. There’s something about the green and red colours that make one panic uncontrollably when stock prices fall. Being unable to sleep well enough or have lingering thoughts throughout the day, hampering productivity, about your portfolio is not the way of life I want to live. I don’t want it on you either.
Don’t try and time the market
So, what exactly do I mean by “keep calm and carry on”? It’s exactly as it sounds. Should a recession smash up against my portfolio like waves on an eroding cliff face, I’ll simply bear the brunt of the impact, shrug it off and look to pick up some valuable stocks at more affordable prices. I’m not here to time the market right. I’m here to make my money work for me.
If I pull out as the markets crash, I could cut my losses or make a small profit, but this would put me at risk. I could find myself in that game so many investors hate to play. Do I invest now or hold off just one more trading day? Is this the lowest the price is going to be? The feeling of regret or fear of missing out (FOMO) plays a huge part in the decision making of humans today and investing is no different.
This situation takes me back to the excellent book The Single Best Investment by Lowell Miller, walking the reader through just how so many investors tend to get it wrong by banking on feelings to time the market, instead of simply riding out the storm. If you miss the golden opportunity to sell out high and buy in low, you’re going to feel worse off, regardless of how many gains you manage to muster up.
Be smart, but invest smarter
By investing on a consistent basis – and increasing said injections in your portfolio when markets drop – it’s possible to dollar cost average (DCA) your shareholdings by purchasing when prices are lower. Sure, the stock won’t look good on your favourite trading app or tracking spreadsheet, but once the market recovers and prices rise, everything will look just fine (or even better in the majority of cases).
There’s also the case for compounding dividend reinvestment. If you’re like me and hold plenty of dividend-paying stocks, during a downturn (like the one we recently encountered with the early stages of the COVID-19 pandemic) companies try their best to maintain dividend payouts, even if their revenue takes a small beating. This is what happened to one of my favourite dividend stocks, Realty Income.
The real estate investment trust (REIT) took a battering, just like the rest of the market. Rents were down, so too was revenue, but the company had enough to pay shareholders a small percentage of its profits. Even though I saw a decline of almost 30% on the price of my holdings, I was still receiving payments for being an investor. If I sold the shares, I would have lost out, but I held and waited for inevitable recovery, which is well underway.
I even managed to almost double my holdings throughout the decline in the early months of 2020 to bag a bargain. This is precisely how I would handle matters during a full-on recession. Increase my stakes in companies, monitor existing holdings to make sure dividends are not being cut, and keep a clear mind that things will recover. It also helps not to gaze at your portfolio performance multiple times per day.