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Should you invest during a recession?

Tristan Harrison
Share prices down

Should you invest during a recession? It’s a difficult question because that’s when the share market looks scary.

Warren Buffett has a great saying when it comes to investing when the share markets panic: “Fearful when others are greedy and greedy when others are fearful.”

It’s easier said than done. Share prices are only punished when things actually look challenged or worse for a business, maybe the whole market. At the start of 2016 things looked particularly bad for resources giant BHP Group Ltd (ASX: BHP) – but that was the best time to buy shares, its share price has more than doubled plus all of the large dividends.

Just over a year ago in December 2018 it was a great time to buy shares which were lower when it seemed the US Federal Reserve would be less supportive for asset valuations.

Further back than that, the GFC was the best time to buy shares this century. In hindsight the answer was an obvious yes, but at the time it seemed that the financial world was caving in. Why put your money at risk when it could go to $0?

What should you do?

The most important thing is to keep your personal finances in good order. Going into debt could cause a negative spiral. Maintaining an income is extremely important – you won’t have any money to invest if you don’t have work.

You should expect earnings to drop at most businesses from banks like Commonwealth Bank of Australia (ASX: CBA) to retailers like Wesfarmers Ltd (ASX: WES). The key is balance sheet strength. If businesses have a good balance sheet then they won’t need to raise capital and they certainly won’t go bust. Indeed, they could acquire under-pressure competitors.

When a business has enough strength to easily survive it just becomes a question of “Would I buy share X if it was simply valued 30% or 40% lower?”. If you focus on the shares you’d answer that question with a “yes”, then it’s definitely a good time to invest.

It would be a similar question about whether you would hold a business you own in a recession if it dropped 30%. At some point there will be a recession you will be presented with much lower prices in your portfolio and other opportunities that you don’t own. If you buy or hold a good share through recession-induced 30% drop then the following year will hopefully (and probably) see a strong recovery. 

The post Should you invest during a recession? appeared first on Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020