The stock market has crashed lately, with the S&P 500 officially entering a bear market after falling more than 20% from its peak.
While recessions and bear markets can intimidate even the best investors, they are also one of the best opportunities to buy. Stock prices are significantly lower now than they were a few months ago, and buying on the downside can help you get more for your money.
However, it is important to have the right strategy. Here’s how to make the most of your money during a recession.
1. Avoid knee-jerk reactions
When stock prices go down, it can be tempting to buy first and ask questions later. Market crashes can sometimes feel like Black Friday sales, when prices are slashed for a limited time and you have to buy now.
However, to make sure you get the best deal possible, take a moment to think about your decision before you buy. Can you afford to invest right now? Do you have a healthy emergency fund? Have you researched this stock thoroughly?
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Market downturns can be fantastic buying opportunities, but they are also one of the worst times to sell. If you buy a stock without thinking and end up having to sell it soon after, you could be at risk of losing money.
2. Take a long-term approach
No one knows for sure how long this bear market will last. Some recessions, like the downturn in the early stages of the COVID-19 pandemic, are quick, and stock prices bounce back almost immediately. Others, however, are more serious. In some cases, stock prices can take months or even years to fully recover.
So it’s smart to prepare for the worst just in case. If stocks don’t rally for months or even years, be prepared to hold on to your investments even if prices continue to fall.
You may see the value of your portfolio drop during that time, but stay focused on the long term and try not to get too caught up in the day-to-day market performance. Given enough time, the market will eventually recover.
3. Do your homework before you buy
Not all companies will be able to survive an economic downturn, and depending on how long this bear market lasts, some stocks may not come out ahead. So it’s critical to make sure you’re only investing in stocks that are strong for the long term.
The strongest stocks come from companies with strong underlying business fundamentals. This means the company’s finances are in good shape, it has a competent leadership team that can guide it through periods of volatility, and it has a competitive advantage in its industry, for example.
The healthier the business overall, the more likely it is to bounce back from market downturns. These stocks are also the best to buy when prices are low, because there is a much better chance that they will rally and make a big profit.
Making the most of a market downturn
Bear markets are not always easy to digest, but they can be incredible wealth-building opportunities. By taking a thoughtful approach, choosing the right stocks, and holding those stocks for the long haul, you can buy the dip while keeping your money as safe as possible.
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