Posted on Wednesday, November 23rd, 2022 at 4:12 pm
Many Americans work hard for decades to save money for retirement. Home improvements are put on hold, funds are deducted from paychecks, and cost-saving budgets are strictly kept so that money can be stored away, invested and grown into a security net for one’s elder years.
But what happens when a recession hits?
That is a key question for workers this summer, as the International Monetary Fund has now officially forecast a global recession and official numbers from the end of July 2022 confirmed that the American economy has shrunk two quarters in a row. The U.S. Bureau of Labor Statistics reported that inflation is at a 40-year peak and the Federal Reserve raised interest rates for the second time in late July of this year. As the economy slows, securities markets slow as well, affecting hard-earned and long-held retirement accounts.
Whether someone should react to the recession or take action to protect their retirement savings depends largely on how close they are to retiring (and many other factors). If retirement is coming up soon, talk to your financial adviser about reducing your investment risk and otherwise pulling back from volatile securities in your account. Those changes could minimize exposure to devastating losses if the market takes a tumble during a recession.
However, many financial advisors give completely different advice to investors whose retirement is still years down the road: DO NOT PANIC during a recession. The U.S. National Bureau of Economic Research found that most modern recessions last for about 10 months. If retirement savings are not needed during that time, then long-term accounts can handle a short-term dip in capital proceeds. Panicking, selling investments, or pulling back from the market during a recession means that an investor may not be able to collect good value for the securities they are selling, so the best advice – usually – when it comes to young savers in a recession is to simply ignore it.
However, recessions can also be amazing opportunities for savers. As famous 18th-century economist Baron Rothschild is believed to have said, “the time to buy is when there’s blood in the streets, even if the blood is your own.” In a bear market with plunging market values, extra cash can be used to purchase low-cost securities which are expected to gain value as the market recovers.
That advice is easier said than done. Spare money for savings is tough to find when the cost of basic living essentials is skyrocketing, but recessions still provide chances to purchase temporarily-lower-value securities if an investor can afford to do so. Contrarian investing – making buy and sell choices against the overall trends – is easiest during a recession because most people are retreating from the market and securities may be under-valued (compared to the economy’s likelihood of eventually recovering).
Even though Boeing’s stock value crashed after the post-9/11 recession in 2002, its purchase price more than quadrupled over the next five years. Those who bought Boeing stock during the slump saw huge capital gains over time if they stayed patient. Similarly, Warren Buffet purchased an interest in the Washington Post Company during the 1973-74 recession and his investment has increased 100-fold since that downturn. If he’d purchased that same investment in a strong economy (and at a higher price), his investment certainly would not have grown over 100 times its original amount.
Even though it may be tempting for young savers to panic or withdraw their investments to protect retirement funds, it is better to wait until stock values recover before selling one’s interests. Instead, retirement planners should remember that the low cost of buying securities during a recession is a great opportunity for increased capital gains if an investor has the cash and bravery to lean into a struggling market.