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What Should Long-Term Investors Do in the Face of a Recession?

What Should Long-Term Investors Do in the Face of a Recession?

September 30, 2022

Unless you’ve been living under a rock, there’s no question 2022 has been a turbulent year for the U.S. markets and the economy. Writing this on September 26, year to date the S&P 500 has fallen 24% and the US Aggregate Bond Market has declined 14.9%. With current inflation rates not seen since the 1980s, people want to know: Is the U.S. in or heading towards a recession?

On the one hand, the U.S. economy experienced two consecutive quarters of negative GDP growth. To some, this would indicate the U.S. may already be in a recession. On the other hand, other indicators have remained positive, with recent reports showing unemployment remained low at 3.7%, along with positive consumer spending levels. However, many economists believe that a recession is in the cards if the Federal Reserve continues to aggressively raise interest rates.

This leads to the bigger question of “What should long-term investors do?” For starters, we at Westfield Financial Planning believe in long-term, goal-focused, and plan-driven investing. Although we pay attention to the markets and the economy and periodically make adjustments, our decision making is not based on current events. I’d like to make one thing crystal clear in an effort to avoid self-sabotage. The single worst thing any long-term investor can do is to sell stocks in their high-quality investment portfolios during a down market and thereby turning a temporary decline in price into a permanent loss of value.

Source: FactSet. Daily data from 3 January 1928 through 31 March 2020. Bear market is defined as the period from a peak to trough, with at least a 20% decline in the S&P 500 index price. Data in USD. Past performance is no guarantee of future results. It is not possible to invest in an index.

The above chart shows time periods where the S&P 500 experienced a bear market, followed by a recovery. Let’s use the 2020 COVID-19 pandemic as an example. February 19th marked the peak of the S&P 500 before the COVID-19 outbreak triggered a freefall that lasted through March 23rd. During this time span, the S&P 500 declined as much as 34% causing a short-lived bear market and recession. Those who succumbed to their emotions were driven to sell and suffered losses. That proved to be a big mistake. The ensuing days and months following March 23rd marked a period of rapid recovery, and by the end of the 2020 year, the S&P 500 had closed up 18.3%.

As history has shown us, there are two lessons to be learned. 1) market recoveries have followed market declines, and 2) selling out during a bear market ensures investors won’t fully participate in the recovery therefore significantly reducing the returns and dollar value of the portfolio.

And so, my answer to the question of “What should long-term investors with high-quality investment portfolios do?” would be, ignore the noise of current events and to continue the course of their long-term goals and plans.

We at Westfield Financial Planning believe in taking a disciplined approach to long-term planning and investing. In times of uncertainty, it’s our job to keep your long-term goals in perspective and to avoid impulsive decision-making. Please contact us to learn more about our services.