What Investors Need to Know About Recessions

Many investors need a refresher on recessions since the longest U.S. economic expansion came to an end early this year.

The standard definition of a recession is at least two consecutive quarters of decline in the GDP — the total value of goods and services produced in the country. In reality, the National Bureau of Economic Research (NBER), the arbiter of recessions, uses many indicators in its determination.  

It usually takes many months or even a year into a recession before the NBER declares it. Not this time. In June, the NBER officially stated the recession began in February 2020, citing the "unprecedented magnitude of the decline in employment and production" with the onset of the COVID-19 pandemic.

So, what do investors need to know about recessions?

First, some facts:

• The average recession — going back to 1857 — lasts 17½ months. The longest was the 1873 recession that dragged on for 65 months. The shortest? Six months in 1980.
• Recessions are shorter than the economic recoveries that follow — which, post-World War II, last an average of nearly 5½ years.
• Financial crises in the 19th century were often called depressions. But after the Great Depression of the 1930s, the less scary term "recession" was adopted for milder downturns.

The NBER also makes the call when a recession is over. It has already said that the 2020 recession may be brief.

But what should investors do right now?

This recession was accompanied by a bear market in stocks. If you’re investing regularly in a diversified portfolio for a retirement that’s years away, you likely don’t need to make any moves. Recessions are just part of the economic cycle and will pass.

That said, there are steps to avoid:

• Panic selling. If you sell your stocks because their value is plunging, you lock in those losses.
• Timing the market. If you abandoned the market because stocks were falling, you need to decide when to get back in. You could wait too long and miss a rebound that can be swift. For example, the S&P 500 index fell about 34% from its high in February to March 23, 2020; four weeks later, it was up by 25%.

One of your best strategies? Dollar-cost-average by investing the same amount on a regular basis no matter what happens in the market. You’ll buy fewer shares when stock prices are high, and more shares when they’re cheap. And you won’t have to guess the best time to invest. (See Take the Guesswork Out of Investing in Volatile Markets.)