The stock market is often the first to feel the effects of a recession. When the economy takes a downturn, stock values often decline, leading to losses in existing portfolios. Analysts predict that if a recession were to occur, the S&P 500 could fall to 3,150, a 34% loss for the year. This is in line with the average 35% decline seen in a typical bear market.
If you want to make the most of a market correction during a recession, it's important to maintain your risk tolerance and asset allocation. For example, if your target balance is 60% stocks and 40% bonds, your share of stocks would decrease if the stock market fell while your share of bonds would increase. The current market crash should offer an excellent buying opportunity for those who have the patience to wait out a few years. By buying more stocks when prices are low, you can lower your average cost and gain more in the long run.
You can also choose to sell bonds in the secondary market before their maturity date. However, it's important not to withdraw money from your stock portfolio when the stock market is down as this can drain your savings. The S&P 500 has been around for 65 years, giving us an insight into how the stock market has performed during recessions since World War II. Surprisingly, the S&P 500 rose an average of 1% during all periods of recession since 1945. Investing in funds such as exchange-traded funds and low-cost index funds is generally less risky than investing in individual stocks during a recession. Dividend shares are also a good option as they divide profits among shareholders based on their number of shares held. Recession alarms have been ringing lately due to inflation and interest rates rising and the stock market falling.
It's important to avoid speculation during a recession, especially with stocks that have taken a beating. If you continue with an average dollar cost in your 401(k) plan or IRA, buying as stock prices fall pays off in the long run. Reinvested dividends also reduce volatility.
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