It is unmistakable:  we are in a recession.  Investors – you and me – are losing money, and it hurts.  

What do we do?  

This recession seems to have a way to go before it bottoms out. Pundits or businesses or the Fed, nobody expects a recovery anytime soon.  As one person put it, “a couple more dominoes need to fall before the market sees a true bottom."  Whether the market will continue going down until Election Day, the end of 2022, or well into 2023 or 2024, for now your best choice of actions as an investor are the same.

What to do with your 401k

The key to optimum growth in a 401k is to continue paying into it.  In fact, if you can, increase the percentage of your salary you pay in each month.  

Why is an increase in your contributions good?  Because money put into your 401k while the market is down buys more stock than when the market is doing well.  Those purchases will be the foundation for greater growth for your investments as the economy recovers.

Study the funds available in your 401k.  Move your money out of the more aggressive funds into the more conservative funds for now.  The aggressive funds have been declining in value, and will continue to do so.  Pick bond funds, funds that stress their conservative approach, even money market funds.  Your goal for the next six months (or more) is to “conserve capital”.  Why?  Because conserved capital – money – will mean having more money to act aggressively, once the market begins its recovery.

Isn’t money in a money market account hurt by inflation?  Yes, it is.  But stock prices are falling at a much greater rate – and inflation still takes its bite out of what is left.  Having the cash to be able to act when the market begins to recover is key. 

Politics trumps economics

Nightmarish hyper-inflation as occurred in Germany in 1923 (see chart) and in Venezuela in 2018-2019 was brought on by catastrophic political change.  Political turmoil at that level makes any economic predictability and security impossible.

The current recession was brought on primarily by the policies, actions, and poor decisions by the Biden administration.  Biden’s American Rescue Plan is an excellent example:  it added 8% to the currency in circulation with no corresponding increase in goods and production – that guarantees inflation.  

How long the economy continues to decline and how long the recession lasts will depend on when political changes occur that are more conducive to increasing peoples’ economic freedom – being to make economic investments and build their economic future.  Such a change by Biden is not consistent with his attitudes nor those of Democrats generally (nor some Republicans).  Voting matters.

The economy’s decline will level off, at some point, as businesses (and people generally) adapt to the level of the Democrats’ negative impact on the economy.  At that point, business and productivity will become more stable, although at lower productivity levels than at present, and the current general decline in stock prices will finally come to an end.  Investing – actively buying and selling stocks – will again be viable.

In the meantime . . .  

Assuming stocks you have purchased are those of productive, growing companies, whether in an IRA or an after-tax account, there are two basic options.

The easy option

The simplest choice is to stay with those companies.  Wait it out.  Look to Warren Buffet as a role-model:  if, like him, you buy companies for the long term, and like him, you can just hold on to those stocks.  They will be among the companies that will recover the soonest and grow most quickly.  

The more difficult option

Begin selling off the stocks you own.  For example, sell ten percent of your portfolio.  If the market continues to fall, in two or three weeks, sell another ten percent.  Repeat that process until your portfolio is two thirds in cash.  

Hold on to the cash, and wait.  Study what happened in the declines of 2000-2003 and 2008-2009.  Watch for similar patterns of recovery.  When stock prices seem to stabilize, begin your buying process.  You sold ten percent at a time; now buy ten percent.  

If done correctly, stock prices will be lower than your selling prices.  You can buy more shares than you had owned before you started selling.  Make the economic decline work for you; it may take a few years, but take the long-term view, and be patient.

This technique works best in an IRA.  In an after-tax account, taxes on your gains must be considered in your calculations.

A good tactic

If you currently own some stocks that are not good performers, or just do not give the impression of remaining strong during the downturn, now is the time to sell them.  Warren Buffet sells stocks that are disappointing performers; so should you.  Better to take a small loss now than a much bigger loss later on.  Put the money from any such sales aside for now; leave it in your account as cash.  Wait until the market bottoms out, then buy stocks that are more likely to show good growth as the economy recovers and improves.

Note that companies change, with changes in leadership and changes in the demand for their specific products.  Don’t assume; do your research.  Your new purchases may not match your stock holdings before the economy began its decline.  Expect change, and make sure your portfolio changes to your best advantage.

Your 401k, again

Once the market hits bottom, move your 401k money back into the most aggressive growth funds available.  Also, consider moving as much of your 401k money into your IRA account as possible, where you can be more aggressive.  

The aggressive investor

A good investor can outperform mutual funds – if he does his research and knows what stocks to buy.  One of your yardsticks as an investor is to reach a performance level higher than that of mutual funds.  Periods of economic recovery are the best times to shine.

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