Magazine

16 Common Questions About Investing in a Downturn

By Ellevest Team

When the markets are volatile (or just plain tumbling), investing can feel … different. In fact, the very idea of investing right now might make you hesitate — or downright sweat.

But we’ve been around a time or two (our chief investment officer, Dr. Sylvia Kwan, has been in the game for more than 30 years), and we’ve got you. Here are the answers to 16 of the most common investing-in-a-downturn questions we get.

A speech bubble that reads, “Investing during a downturn?”

Questions about how investing during a downturn works

How, exactly, does an investment portfolio recover after a loss?

The value of your investment account equals the value of all the individual investments you own, added together. As the investments you own gain (or lose) value, the balance of your account overall generally goes up (or down).

When the stock market “falls,” that means most stocks on the market have lost value — and since a diversified investment portfolio generally includes lots of different stocks, that is what causes your portfolio’s balance to go down. But here’s the thing: If you leave your money invested and the markets go back up (aka the value of those stocks rises again), then the value of your investment portfolio would go back up, too.

So generally, the worst thing you could do would be to withdraw your money after the market drops. Then you will have “locked in your losses,” as they say, and you won’t have the opportunity to let your portfolio go back up.

That’s why we recommend keeping your money invested, even (or maybe especially) when the markets are “down.” The best response is to invest regularly, for the long term.

For historical context, if you invested in the stock market in 1929 (right before the Great Depression) and then stopped, it would have taken you more than 25 years to recover your investment. If instead, you had invested at the beginning of every year after that (thus, buying into the market at lower prices), it would have taken you less than seven years to recover. Even better for 2008: If you had invested at the market’s peak in late 2007 and then stopped, you’d have recovered in about five years; if you’d invested regularly, you’d have recovered in less than two years.

Is it a good idea to invest more when the stock market is down?

We do recommend investing when the market is down when you’re investing for the long term. But rather than investing a bunch at once, we like to recommend smaller increments over a time period. This allows you to invest without having to guess when the best day to do it might be. If you’re investing a little bit consistently, you’ll be in on some up days and some down days, and pay an average price over time.

What are your thoughts on investing in a single company’s stock?

We don’t consider ourselves to be experts at picking stocks — or even industries. History and research has proven that nobody can do that reliably, which is why most mutual funds underperform year after year.

We recommend investing in a diversified investment portfolio that includes stock, bond, and alternative ETFs and mutual funds. History has shown that this has been a more reliable way to grow your money by investing.

Is gold a good investment?

At Ellevest, we don’t invest our clients’ money in individual investments — instead, we use exchange-traded funds (or occasionally mutual funds, in certain portfolios), which are baskets of many different investments put together. There are a lot of benefits to funds, and you can read more about that here.

That being said, if you want to buy specific investments like gold, that’s up to you — we just strongly recommend that you don’t use any money that you need. Investing like that can be risky, so only use funds that you wouldn’t mind losing in case it doesn’t work out.

What’s considered “long term” in investing?

Good question. When we talk about “investing for the long term,” often with your retirement, for example, we typically mean 10 to 15+ years. For those goals, we’ll recommend more stocks than bonds for your portfolio when you start out. But as you get closer to your goal date, our investment recommendations will include less stock and more bonds in order to lower your portfolio’s overall risk.

At Ellevest, we still generally recommend investing instead of saving if you’re just getting started on that goal and have at least a year or two until you’re going to need the money.

Is it possible to lose all my money by investing?

If you were to invest in just a handful of stocks, it’s possible that your investments could go to zero.

The investment portfolios we offer at Ellevest are diversified across stock, bond, and alternative investment funds. This means your portfolio is exposed to stocks and bonds of literally thousands of companies. With the level of diversification that we provide our clients, losing all your money is a very, very remote possibility.

How long does it take the market to recover from hits like this?

What happened in the past is no guarantee of what will happen this time. But since 1956, the average bear market (downturn) has lasted one year and two months with a decline of 36%. In contrast, the average bull market (upturn) has lasted five years and nine months, with returns 192%.

A graph that charts stock market bull and bear cycles from 1956 to present.

Generally, the worst thing you could do would be to withdraw your money after the market drops. Then you will have “locked in your losses,” as they say, and you won’t give your portfolio the opportunity to go back up if the markets go up. That’s why we recommend keeping your money invested, even (or maybe especially) when the markets are “down.” The best response is to invest regularly, for the long term.

About what you should be doing (or not doing)

Should I take my money out of my investment account to make sure I don’t lose it?

Historically, trying to guess whether it’s the “right” time to invest (or not) hasn’t been a good strategy. The markets might fall again tomorrow, or they might go up a lot. We simply can’t know — no one can. That’s why we recommend adding to your investment account regularly — even when the markets are down. You’ll end up investing during both good markets and “bad” markets, and it can all average out in the end. This approach is called dollar-cost averaging. (Plus, when the stock market is down, stocks cost less to buy. That could be great for your bottom line if the markets go back up again — as they have in the past, over time.)

If I have extra money, what’s the best thing to invest in right now?

We recommend investing in broadly diversified investment funds like exchange-traded funds, aka ETFs. These have a lot of benefits, and you can read about them here. The recommended mix of stock, bond, and alternative funds in your portfolio depends on how long you have to invest — generally, the longer your timeframe, the more exposure to the stock market you can “afford.”

We also recommend investing a bit at a time, regularly, rather than making a large deposit all at once. As mentioned above, this allows you to invest without having to guess when the best day to do it might be. If you’re investing a little bit consistently, you’ll be in on some up days and some down days, and pay an average price over time.

Is now a good time to invest a lump sum?

We do recommend investing even when the market is down when you’re investing for the long term. But rather than depositing a lump sum, we like to recommend smaller increments over a time period, aka dollar-cost averaging. Again: This allows you to invest without having to guess when the best day to do it might be. If you’re investing a little bit consistently, you’ll be in on some up days and some down days, and pay an average price over time.

Should I divide my investment deposits up weekly instead of monthly?

Repeating ourselves, because it bears repeating: When you invest regularly over time, you’re following a strategy called dollar-cost averaging. This allows you to invest without having to guess when the best day to do it might be. If you’re investing a little bit consistently, you’ll be in on some up days and some down days, and pay an average price over time.

If you invest more often (like weekly rather than monthly), then you’ll be spreading your risk out more evenly over time. But ultimately, how often you do it is up to you.

What should I do with my short-term investment goals?

Generally, we recommend keeping any money you’re saving to use in the next year or two in a guaranteed place, like a savings account. But if you already invested it and your account dropped, that’s tough.

If you really need the money now, you should of course withdraw it. Otherwise, you could choose to leave it invested as long as you can — that gives your money the chance to benefit from any recovery the market might make before you need it. That being said, it’s impossible to know whether markets will rise or fall in the short term, so if you’re extremely nervous, you could also choose to withdraw it. (Just know that withdrawing it could also have tax consequences.)

Should I move my money from stocks to bonds?

That depends on how long you have to invest. Stocks have historically offered the possibility of higher returns, but that comes with higher risk. Bonds returns are generally lower, but they can have lower risk compared to stocks. The longer your time horizon is, the more exposure to stocks you can generally “afford” to have in your portfolio.

The investment portfolio Ellevest builds for each of your goals is tailored specifically to your timeline. We recommend following that plan, even in times of volatility.

About what Ellevest is doing right now

What is your investment approach during an economic downturn?

We don’t have a different investment policy during economic downturns (aka recessions), and here’s why: When we design investment portfolios and plans for our clients, we build in the expectation that downturns like this one — and worse — might happen. That includes making sure your portfolio is well diversified, and that the amount of investment risk you’re taking matches up with the amount of time you have to invest.

How can I change my Ellevest portfolio’s exposure to the stock market?

The investment portfolio Ellevest builds for each of your goals is tailored specifically to your timeline — generally, the longer you have to invest, the more exposure to stocks we’d put in your portfolio. Our recommendations take downturns like this into account, so we recommend sticking with your plan even during times of volatility.

That being said, if you would like to adjust the exposure to stock in your portfolio, you could choose to make your portfolio 5% more conservative (or 5% riskier) in your goal settings (except for retirement goals). You could also adjust the time horizon of your goal — longer if you want more exposure to stocks, shorter if you want less. Feel free to try different time frames to see how it impacts your portfolio.

Does Ellevest automatically rebalance my portfolio in response to market changes?

Yes. The market volatility means that your portfolio may have drifted from its target asset allocation (the recommended amount of stocks vs bonds vs other types of investments that you own).

At Ellevest, we monitor your portfolio and automatically “rebalance” it back to its recommended target whenever your stocks or bonds drift by 2–3%, depending on your investing goal.

Rebalancing often means buying into asset classes that have declined (and gotten less expensive) and selling those that are relatively more expensive to get you back to your target. When that happens, you’re automatically “buying low” or “selling high” — the holy grail of investing — without having to do a thing. That’s a plus when emotion has overtaken the market.


Disclosures

 © 2023 Ellevest, Inc. All Rights Reserved.

All opinions and views expressed by Ellevest are current as of the date of this writing, are for informational purposes only, and do not constitute or imply an endorsement of any third party’s products or services.

Information was obtained from third-party sources, which we believe to be reliable but are not guaranteed for accuracy or completeness.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities, and should not be considered specific legal, investment, or tax advice.

The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person.

Investing entails risk, including the possible loss of principal, and past performance is not predictive of future results.

Ellevest, Inc. is an SEC-registered investment adviser. Ellevest fees and additional information can be found at www.ellevest.com.

Ellevest Team

Ellevest helps women build and manage their wealth through goal-based investing, financial planning, and wealth management. Our mission is to get more money in the hands of women.