3 Things All Investors Should Know About Recessions

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The idea of a recession can be scary to investors. But here’s why you may not need to stress about one so much. [[{“value”:”

The recession warnings that were rampant in 2022 seem to be slowing down for now. But still, every so often, you’ll read the news and see the dreaded R-word thrown around, and it may be enough to spook you just a little bit.

It’s easy to see why the idea of a recession might scare you as an investor. But these three points about recessions might make you feel less worried about the idea.

1. They’re not always lengthy

Some recessions in U.S. history have lasted over a year, like the Great Recession that spanned December 2007 to June 2009. But not every economic recession is a prolonged event. In fact, the recession spurred by the pandemic in 2020 only lasted two months, from February through April, technically speaking.

You should know that the U.S. has experienced 34 recessions since 1857, with an average length of 17 months. But many of those recessions were over in less than a year. So the next time a recession starts, don’t panic. The economy isn’t guaranteed to be in a slump for years.

2. They’re not always extreme

When we think of recessions, we tend to imagine extended periods of extreme economic distress. That’s not always the case, though.

Some recessions are mild in nature in that unemployment rises, but not to a super extreme degree. Of course, some recessions are mild by virtue of not lasting very long, too.

As an example, the Gulf War Recession of 1990 to 1991 lasted eight months and was considered relatively mild. That recession was largely fueled by interest rate hikes on the part of the Federal Reserve coupled with Iraq’s invasion of Kuwait that drove oil prices upward.

3. They don’t always affect portfolio values

You might assume that as soon as a recession hits, the value of your investment portfolio is going to tank. But that may not be the case.

Although recessions can coincide with stock market declines, that doesn’t always happen. Since 1928, the stock market has experienced 25 bear markets, which are classified as periods when stock values fall 20% or more from a recent high. But of those 25 stock market downturns, only 14 actually overlapped with recessions.

How to set yourself up to get through a recession

It’s natural to worry about a recession as an investor. But there’s a simple move you can make to protect your portfolio from recession-related upheaval: Build yourself an emergency fund.

If you sock away enough money in a savings account to cover three to six months of essential bills, you’ll have cash to fall back on in the event of a recession-fueled layoff. And that could make it possible to avoid tapping your portfolio and taking losses in your brokerage account due to a need for money.

Remember, the value of your portfolio may decline during a recession. But if you leave it alone, there’s a good chance it’ll come back up as the market and economy recover. By making sure you’re loaded up on emergency cash reserves, you’ll make it less likely that you’re forced to liquidate investments when they’re down and take an actual loss.

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