Knowing the best course of action for your money can be challenging in uncertain times. Do you keep investing in stocks and hope the market rebounds? Or do you go to cash and wait for things to stabilize?
Both options have pros and cons, and deciding which is the right move for you can be challenging. Which is best?
Should you invest during a downturn?
History has shown us time and again that the markets always recover from dips, so if you have a long-term investment horizon, it makes sense to stay invested and ride out the volatility.
Of course, this isn’t always easy to do when your portfolio takes a hit. If you are worried about staying invested during a downturn, consider investing in some defensive stocks that tend to hold up better in market corrections. These include consumer staples, healthcare, and utility stocks.
Investing during a downturn can also be an excellent opportunity to buy quality stocks at bargain prices. If you have cash on the sidelines, this may be an ideal time to put it to work by buying shares of companies that are temporarily out of favor but still have sound fundamentals.
Sound fundamentals include:
- A strong balance sheet.
- A history of profitability.
- A moat that will protect the business from competition.
Additional metrics to consider are the price-to-earnings ratio and the price-to-book ratio. Stocks with low valuations relative to earnings and book value are often suitable for purchase during a market correction.
Some tips for investing during a downturn:
- Don’t try to time the market: It’s impossible to know when the bottom will hit, so don’t try to guess. Instead, focus on buying quality stocks at reasonable prices and holding them long-term.
- Build a diversified portfolio: When you diversify, you spread your risk around and reduce the chances of taking a big hit if any one sector or stock underperforms.
- Stay disciplined with your buying and selling: Limit emotional decisions about what to do with your money. Stick to your investment plan and only buy or sell when it makes sense from a financial perspective.
- Invest in the team, not the stock: When you invest in a company, you invest in the management team, the products, and the strategy. Many people invest based on a stock price. However, they neglect the fact that companies are made up of people. By investing in the team, you are investing in the company’s ability to execute its vision and generate returns for shareholders.
Industries expected to grow in the next decade
If you decide that investing is the best move for you, a few industries are expected to grow in the next decade that stand out. Technology, healthcare, e-learning, and renewable energy are all industries that are expected to experience significant growth in the coming years.
- Technology: The information technology industry was valued at $5.2 trillion at the beginning of this decade. With a 4.3% CAGR by 2026, the industry is showing no signs of slowing down. Technology is driven by the continued adoption of new technologies such as artificial intelligence, cloud computing, and blockchain.
- Healthcare: Set to reach $665 billion by 2028, healthcare is being driven by an aging population and the continued development of new treatments and therapies.
- E-learning: Projected to grow at a CAGR of 14.6%, the e-learning industry is being driven by the increasing popularity of online learning and the need for flexible and affordable education. The industry is expected to reach $374.3 billion by 2026.
- Renewable energy: With $1.4 trillion in renewable investments in 2022 alone, renewable energy is benefiting from increasing concerns about climate change and the need to move away from fossil fuels.
Investing in these industries can be an excellent way to get ahead of trends and benefit from long-term growth. However, it’s important to remember that no sector is without risk. Before investing, be sure to do your research and understand the risks involved.
What about going to cash?
There are also some scenarios where it may make sense to go to cash. If you need the money in the near future, it’s probably not a good idea to keep it invested in stocks. The market constantly fluctuates, and there’s no telling when it will take a dip. If you need the money for a major purchase or expense within the next few years, it may be best to move it into a savings account or short-term bond fund where it will be less volatile.
Another reason you might want to go to cash is if you are nearing retirement age. Once you’re retired, you’ll likely start drawing down your investment portfolio to cover living expenses. If the market dives just before or after you retire, it can significantly impact your lifestyle. To help preserve your retirement income, you may want to start moving some of your portfolio into cash a few years before you retire.
Some good practices for liquidating your portfolio:
- Don’t sell everything at once: If the market is down, it will likely rebound. You can take advantage of any upward swings and minimize losses by selling a little bit at a time.
- Use the age-inverse rule: The older you are, the more conservative your portfolio should be. Moving some of your investments into cash is a good idea as you get closer to retirement. The age-inverse rule is a guideline that suggests you should subtract your age from 100 to determine what percentage of your net worth should be in stocks. So, if you’re 60 years old, 40% of your net worth should be in stocks.
- Reinvest excess cash: If you have money you don’t need for immediate expenses, consider reinvesting it into lower-risk investments such as bonds or treasury bills. These can provide stability to your portfolio while allowing you to grow your wealth over time.
The bottom line
There is not necessarily a right answer about whether you should go to cash or keep investing during a market downturn. It all depends on your individual circumstances and financial goals. If you need the money soon, or if age and retirement are approaching, it may be a good idea to start selling off some of your investments.
However, if you’re young, have a stable income, and have a long time horizon, you may want to hold onto your stocks and ride out the market fluctuations. Experiencing a downturn with skin in the game can also be an excellent way to build your risk tolerance and become a more savvy investor. Ultimately, the decision comes down to what makes the most sense for you and your financial situation.