What Does A Recession Mean For Your Long-Term Investments?


Author, Serial Entrepreneur, Real Estate Investor, Stock Trader & cofounder of The Ligon Group.

One of the most common questions I’m asked regarding investment analysis is, “What’s going to happen to my long-term investments during a bear market or recession?” Many businesses and business leaders use the stock market as an investment choice for their businesses, retirement accounts and IRAs.

Whenever the stock market enters correction or recession territory, business leaders and investors who are holding positions in major U.S. stock indexes start to question what they should do. Should you bail or go down with the ship? The initial thought is that if the market goes down, you’re losing money. However, as a seasoned stock trader and investment analyst, I believe that’s really just a perception of the current moment in time. Let’s zoom out and take a 30,000-foot view of what, in my experience, really happens when the market begins to enter bearish territory.

You haven’t locked in any losses…yet.

Just because the stock market enters a bearish market doesn’t mean that you’ve lost any money. You lose money when you close your positions. This means that even though your investments are down, you have not locked in any losses until you sell them at a loss. This is an important distinction. If you are holding long-term investments, you need to think about your overall goal before you make a reactive decision. What’s happening today is very different from what may be happening ten years from now.

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Time is your ally.

A bearish market only lasts a fraction of the time that a bullish market lasts. A bullish market lasts, on average, 32.4 months, and a bearish market only lasts about 10 months. In addition to a bull market lasting much longer, it also yields a higher percentage of gains (approximately 112% each bull market) versus the losses from a bear market (approximately 32.5% each bear market). The longest bull market started in 2009 and lasted until 2020, and it resulted in a gain of more than 400%. Relying on historical data as a business leader is essential for making informed decisions on your investments.

All stocks are on sale.

When the stock market enters bearish territory, and the U.S. indexes drop, all blue chip stocks are pulled down to record lows. Major American companies unintentionally provide a super sale on all stocks. This might be a good time to consider buying. There’s a timeless saying that goes, “buy low, sell high.” Well, correction territories and recessions provide opportunities for massive discounts on major blue chip stocks and U.S stock indexes that you won’t get at any other time. So, in addition to adding shares to your existing positions, you can increase your overall portfolio with prices you may never see again.

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How To Prepare

As a business leader and investor, avoid making any drastic changes; take modest and more conservative actions. A great way to weather the storm of a bear market is to diversify your accounts. Keeping 10% to 20% of your overall portfolio in cash gives you options in a down market. You can choose to enter new positions at discounted prices or simply add to your current holdings. If you were to add to your current positions, you would be able to create a more favorable cost basis for your overall investment.

Here’s an example: Let’s say you are holding 10 shares of XXX company at a cost of $20.00 per share, and you’ve lost 20% during a bear market. Your shares are worth approximately $16.00 a share. If you were to purchase five more shares at $16.00 per share, you would adjust your current cost basis to approximately $18.67. Now, instead of holding 10 shares at $20.00, you have 15 shares at $18.67, which provides you with a more favorable position for your long-term investment.

The Takeaway

When the stock market enters correction or recession territory, it can be a scary time for a lot of people and businesses. Panicked decision making and emotional reactions to market movements can be devastating to your investments, so do your research. You can utilize historical data to develop bear market strategies. Understanding how the market moves over long periods of time is paramount to your investment objectives.

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During this time, entering new positions and adjusting your current cost basis, as detailed above, can provide excellent opportunities for increased gains over time. Increased gains equal more money, and more money equals more options. Small adjustments during a bear market can lead to large increases over a five- to seven-year (long-term) investment. As a business leader, you may choose to close stock positions from time to time in order to liquidate assets for business capital. If you were to take advantage of some of these bear market opportunities, you may be able to close out only the newly adjusted positions, which would yield a profit yet not affect your original investments. Those newly acquired funds could be used toward business growth. Some of the world’s most profitable business leaders and stock investors have increased their wealth in bear markets.

In the wise words of Warren Buffet: “If you’re making a good investment in a security, it shouldn’t bother you if they closed down the stock market for five years.” Long-term investments should be viewed exactly as you intended them: long-term.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


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