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Should fears of an economic downturn prompt you to stop investing? Read on to see.
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Will a recession hit in 2023? It’s really hard to say.
Many financial experts seem convinced that we’re headed for a period of economic decline. The Federal Reserve even says a near-term recession is likely.
Now, a recession can mean different things. In many cases, recessions lead to an uptick in job loss. They can also impact the stock market as well as the housing market.
Given the potential for a 2023 recession, you may be wondering whether now’s a good time to stop investing in your brokerage account or IRA. And the answer is, if you can afford to keep investing, it definitely pays to do so — despite the recession warnings that keep sounding.
It pays to put your money to work
It’s possible that stock values will drop during a recession. But that shouldn’t lead you to stop investing today.
Your best bet as an investor is to hold stocks for the long term. So if you invest in stocks this month and their value tumbles later on in 2023, you won’t necessarily be out any money. If you don’t sell them and wait for their value to recover and grow, you can easily come out ahead.
To give you an example of how important it is to keep investing even in the face of recession warnings, over the past 50 years, the stock market, as measured by the S&P 500’s performance, has delivered an average annual return of 10% before inflation. Now, keep in mind that that 10% accounts for both strong years on the part of the index and bad years.
Meanwhile, if you were to invest $1,000 in an S&P 500 ETF this year, sit back, and do nothing, in 30 years, your investment could be worth over $17,400, assuming that same 10% average yearly return. It may be that if you were to invest that $1,000 today, in six months, it might only be worth $900 if a recession were to strike and impact the stock market. But in time, you might end up with well more than your initial investment.
Make sure you’re prepared for emergencies
If you’re worried about a near-term recession, the only reason to stop investing now is if you’re not confident in your emergency fund. You should aim to have enough money in the bank to cover a full three months of essential bills at a minimum. If you’re not there yet, stop investing and start pumping more money into your savings account.
But as long as you have a solid emergency fund and are confident in your ability to be able to pay a few months of bills in the absence of a paycheck, there’s no reason to stop investing just because recession warnings keep popping up.
We don’t even know for sure that a recession will strike in 2023. But even if that happens, there’s no guarantee that it will impact the stock market significantly. And even in that scenario, there’s still a good chance you’ll benefit financially in the long run by putting your money to work today.
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